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ABB Ltd. (ABB) is taking a steep bet that tougher U.S. energy regulations will spread to other major industrialized countries such as China, as it spends $4.2 billion to buy Baldor Electric Co. (BEZ), a 41% premium on the U.S. company's prior share price.
The Zurich-based power and industrial automation company hopes to tap into U.S. motor efficiency legislation coming into force Dec. 19 and mandating tougher environmental standards for electrical motors used in industrial settings. ABB estimates more than 1.4 million motors will be replaced in the U.S. annually as a result. ABB expects countries such as Canada, Mexico and some European states to adopt similar rules next year, as well as China and Australia to eventually follow, ABB said Tuesday in a presentation.
The wager--ABB's priciest in a recent string of purchases under former General Electric Corp. (GE) executive Joe Hogan--hinges on ABB successfully wringing the $100 million cost savings from the deal and "at least" the same in synergies from combining the two companies, according to analysts, including Bank Vontobel and independent brokerage Helvea.
"There is good scope for ABB to achieve these given its excellent geographical position and strong product range, particularly in the drives market. This will enable it to sell Baldor products outside the United States and strengthen the selling of ABB's existing products in the U.S.," Helvea analyst Alessandro Migliorini said. He rates ABB stock at neutral with a CHF21 target price.
The savings--mainly from reducing the costs of purchasing materials--are set against roughly $50 million in costs to integrate Baldor, which ABB will book early next year.
Under the terms of the agreed deal, ABB is paying a 41% premium for Baldor--$63.50 a share, compared with Monday's closing price of $45.11--or $4.2 billion in total, including $1.1 billion in net debt.
Investors initially took to the acquisition cautiously, according to traders due to the high price tag. At 0942 GMT, the stock had snapped back from early losses to trade CHF0.11 higher, or up 0.6%, at CHF19.63, underperforming a 0.8% rise in the Stoxx Europe 600 industrial goods index.
ABB said it could continue its shopping spree, even after using part of its roughly $5.3 billion cash pile to buy Baldor, which bolsters ABB's position in the U.S. market for motors considerably.
"We still have excess cash, and some people would define our balance sheet as efficient, so we continue to look at opportunities out there," Hogan said on a media call detailing the acquisition.
Specifically, ABB appears to still be smarting from losing the expensive battle for U.K.-based maker of backup power systems for computer centers Chloride Group PLC (CHLD.LN) in July, won by Emerson Electric Co. (EMR). The market for uninterruptible power supply data centers is one in which ABB would like to play a larger role through acquisitions, Hogan said.
ABB is buying Baldor, which mainly competes with Regal-Beloit Corp. (RBC), Siemens AG (SI) and GE, as the Fort Smith, Arkansas-based company begins to benefit from improving global demand, after a slump in demand last year. The two companies fit "like a glove" with little overlap in products or geographies, ABB executive Ulrich Spiesshofer said.
This year, ABB acquired U.S.-based Ventyx, which makes software for the energy sector, for more than $1 billion, spent about $965 million to raise its stake in its Indian subsidiary, ABB Ltd. (India) (500002.BY) to 72% from 52%, and bought U.S. measurement product maker K-TEK for an undisclosed price.
-By Katharina Bart, Dow Jones Newswires; +41 43 443 8043; firstname.lastname@example.org