Swiss multinational industrial company ABB (ABB) has been teasing investors for a little while now. While management has done a laudable job of cutting costs, seemingly everyone has been waiting for announcements with a little more "oomph" -- specifically, deals that can goose the company's growth rate. After more than a few near-misses, ABB found a deal that should make investors happy, as Thomas & Betts (TNB) looks like the right company at the right price.
The Deal To Be
The boards of ABB and Thomas & Betts have agreed on a deal that (if approved by shareholders) will see ABB acquire the company for $3.9 billion in cash. That works out to $72 per share and a 24% premium to Friday's close. In paying over 10 times EBITDA, ABB is hardly fleecing Thomas & Betts shareholders, especially considering that this company has struggled to produce consistently good returns on capital. Nevertheless, there are some definite synergies that should reduce the effective cost to ABB, as well as the prospects of an eventual recovery in the construction markets that make up a sizable percentage of Thomas & Betts' business.
A Good Fit For ABB's Gaps
Thomas & Betts manufactures low voltage and ultra-low voltage components for industry, utility, construction markets. While there will be some overlap with ABB's existing low voltage business, the greater focus on connectors, conduits, and fitting at Thomas & Betts will have the effect of expanding ABB's offerings.
Arguably even more important to ABB is the geographic exposure of Thomas & Betts. TNB is heavily exposed to North America, while ABB has generally lagged behind other multinationals like Schneider and Legrand, as well as smaller U.S. players like Cooper (CPB) and Hubbell (HUB.A). With this deal, ABB adds not only Thomas & Betts' existing business, but its large distributor network and the ability to funnel more of its own low voltage products through that channel. Given the size and growth of the North American market, ABB's under-exposure has been an issue and this deal goes a long way towards patching that gap.
ABB Has To Focus On Offense
To a large extent, ABB has made itself about as trim as it can, and has done a very laudable job of offsetting price erosion and competition with internal cost-cutting. Rivals like Siemens (SI) would love to be able to accomplish what ABB has done in that regard. Still, defense can only keep you in the game; it takes offense to win.
Aside from a deal for Baldor about a year ago, ABB has seemed shy about going after deals. Numerous likely targets have gone to other hands willing to pay a little more. It's nice that ABB's board is worried about valuations and economic returns, but sometimes companies have to pay up to get key assets.
Look around the world a bit to see why this matters. Although ABB does well against Siemens and Schneider in some emerging markets like China and India, that's not necessarily the case in Europe or North America. In fact, Alstom recently won a bid in Europe that should have gone to ABB and did so with aggressive pricing. Making matters worse, strength in emerging markets is only worth so much; countries like China have a stated goal of promoting domestic champions and that has to ultimately curtail some of the emerging market opportunity for ABB.
The Bottom Line
ABB doesn't get enough credit for the fruits of its internal R&D program. The company has been expanding its high power semiconductor business and stands a fair chance of penetrating growth markets like enterprise data centers. The company also holds its own with Siemens, Schneider, and Eaton (ETN) in power markets due in part to that internal product development effort. All that said, it's nice to see management bringing out the checkbook and making a smart deal.
Even with the solid move in ABB stock since December, these shares are still undervalued on relatively modest growth assumptions. With management now apparently on the offense, this could be one of the best European industrials to own for 2012.