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NEW YORK (
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.
On Monday, Thomas & Betts reported fourth quarter earnings per share of $1, beating
Zacks consensus estimates of 90 cents. For the full year, the company reported EPS of $3.55 on $603 million in 2011 sales.
General Cable Corp.(BGC),
Cooper Industries(CBE) and
Wesco(WCC) have similar U.S. electrical components and transmission operations, but analysts say the deal puts some of the companies into the M&A crosshairs and others on the sidelines.
The deal targets the low voltage electric distribution networks and equipment of Thomas & Betts, in addition to U.S. diversification. "This fills one of the largest gaps in the company, which was not having a meaningful presence in the world's largest low- voltage market," said ABB Chief Executive Joe Hogan on a media call.
Hogan, who's been outspoken about being disciplined in M&A, has started cutting deals as the company targets up to 10% sales growth a year from acquisitions. The Thomas & Betts buy and a $3.1 billion Jan. 2011 purchase of
Baldor Electric, both deals that target energy distribution bottlenecks, are ABB's two largest deals since 2010 in an M&A boost that's included $9 billion worth of U.S. companies, according to
As a result, the moves may now put ABB on the deals sideline once more. Morgan Stanley analyst Nigel Coe wrote in a Monday note that the deal makes a Rockwell Automation and Cooper Industries takeout unlikely. Coe highlights the spun pieces of
Tyco International(TYC) as the most likely targets in the space.