NEW YORK ( TheStreet) -- ABB Ltd.'s (ABB - Get Report) $3.9 billion deal to buy power-distribution equipment specialist Thomas & Betts Corp (TNB) at a 24% premium may have big implications for deal activity in the sector.
ABB's purchase signals that some large international electrical engineering conglomerates -- weighed down by earnings and diversification needs -- may look to cut deals in the U.S. Deals may also be propelled by the fragmented nature of the sector, its low pricing power and a cyclical upturn, according to analysts.
ABB's deal to buy Memphis Tenn.-based Thomas & Betts signals that consolidation is "inevitable" in the electrical engineering space as companies try to become more "vertically integrated" while European conglomerates look for U.S. assets to hedge a Eurozone slowdown and falling euro, writes Barclays Capital analyst Scott Davis in a Jan. 29 research note.
"This group has long struggled with scale issues, global coverage, and pricing power," writes Davis. Other keys to the deal include the strong diversification benefits between Thomas & Betts' over 80% North American oriented sales and ABB's stated intent to bump U.S. sales up to a third of its overall revenue from a current 19% share. In addition, Davis expects that the electrical engineering tie-up will catch an upturn in key utility and construction end markets."Although hard to predict, we would expect any transaction to cause further consolidation within the industry. It's logical and timely," writes Davis. Thomas & Betts shares rose over 22% to $71.03, slightly below ABB's $72 a share offer on news of the deal, adding to the company's near 15% 2011 stock gain. For more on electrical equipment stocks, see TheStreet Ratings' portfolio of top rated electrical equipment stocks. ABB shares fell nearly 3% to $20.63 on news of the deal.