Hitachi has finally reached on the decision to buy ABB’s power grid business for around 800 billion yen, which means around $7 billion, as per the source familiar with the matter. The Japanese industrial conglomerate has been looking forward to strengthen its overseas presence in a market, which is growing at a fast pace. The two multinational’s Hitachi and ABB are likely to hold a news conference to announce the agreement, today.
Last week, Hitachi’s board gave a confirmation regarding their plans to take the deal ahead, which would become the biggest-ever acquisition ever made by the Japanese industrial conglomerate. This hefty purchase is likely to cost 600 billion to 800 billion yen.
The company’s strategy behind the move is to merge main companies leading in power generation and information technology to lead as a global player, especially when core rivals such as General Electric has made a shift from the energy business towards fossil-fuel and nuclear sources.
ABB is the operator of the largest grid business in the world. With this upcoming deal, Hitachi would become the second-biggest heavy electrical equipment maker in the world by revenue, second to just General Electric.
The Japanese industrial conglomerate is likely to use ABB as a separate company, and will spend on the new spun-off company strategically in stages. Eventually, the company looks forward to change it completely, into a wholly owned subsidiary over a couple of years. With such a clever move, the company wants to play safe by cutting the chances of damage from any kind of changes in the business landscape.
The power and energy operations of Hitachi registered sales of 450.9 billion yen during the financial year, which ended on March 31, but it was able to make an operating profit margin below 6%. It has a quite diverse division, spanning from fossil-fuel, renewable, and nuclear energy generation, and transmission and distribution systems. Its highly diverse divisions depend on the Japanese market for most of its business.
Whereas, in 2017, the power grid operations of ABB booked nearly $1 billion in adjusted earnings, prior to the interest, tax, depreciation and amortization. The profit margin of the segment was relatively high 10.3%.
The Japanese industrial company is determined to grow its group operating profit margin to 10% by financial year 2021, by participating in acquisitions like this upcoming ABB deal, and by collaborating and scrapping many of its more than 899 group companies both within and outside Japan.