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ABB to Sell Majority Stake in Power Grids Business to Hitachi

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ABB Ltd (ABB - Free Report) recently announced its plan to divest 80.1% of its Power Grids business to Hitachi Ltd. (HTHIY - Free Report) . The company anticipates returning net cash proceeds of $7.6-$7.8 billion to shareholders from the transaction. The deal is subject to regulatory clearance and projected to close by the first half of 2020.

As stated by ABB, the enterprise value of its Power Grids business is put at $11 billion. Also, the company will work on modifying the structure of its remaining businesses. Notably, with the restructuring, the company expects an annual run-rate cost reduction of about $500 million following $500 million in restructuring charges.

Initially, the company will retain 19.9% of the Power Grids business, which will facilitate a seamless transition. Also, the deal empowers ABB with an exit option for the retained stake at fair market value with a floor price set at 90% of the enterprise value. Notably, the pre-defined option is exercisable by the company three years after closing.

As a matter of fact, the divestment of the Power Grids business will enable ABB to focus more on its core businesses, including areas like automation apart from technologies such as artificial intelligence. On the other hand, the deal will allow Hitachi to strengthen its global presence in the power grid industry.

Existing Business Scenario

ABB expects that its state-of-the-art digital offering — ABB Ability — financial strength, technological expertise, strong market presence and wide geographical business scope will aid in bolstering its profitability over the long term. Moreover, the company believes that robust macroeconomic conditions in the Europe and expected economic growth in China will boost its competency.

Also, the company has been strengthening its competency on the back of its ongoing Next Level Strategy. On the other hand, stronger productivity and diligent cost-cutting initiatives will likely improve its operational efficacy over time. Finally, strategic corporate collaboration deals with renowned companies like SNC-Lavalin are also expected to reap benefits.

Meanwhile, the Zacks Rank #3 (Hold) company’s shares have lost 3.9% over the past month, narrower than the industry’s average decline of 6.7%.

However, rising cost of sales has been a major concern for ABB over the past several quarters. The company noted that tariffs levied on U.S. imports are escalating the prices of its key inputs like steel, copper and aluminium. Inflationary pressure might continue to escalate ABB's aggregate cost and hence, weigh over its profitability in the quarters ahead.

Stocks to Consider

A couple of better-ranked stocks from the same space are Luxfer Holdings PLC (LXFR - Free Report) and Rexnord Corporation (RXN - Free Report) . While Luxfer Holdings sports a Zacks Rank #1 (Strong Buy), Rexnord carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Luxfer Holdings surpassed estimates thrice in the trailing four quarters, the average positive earnings surprise being 24.27%.

Rexnord outpaced estimates in each of the preceding four quarters, the average earnings surprise being 17.71%.

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