TOKYO -- Hitachi is in the final stages of talks to acquire the power grid business of Switzerland's ABB for up to an estimated 800 billion yen ($7.06 billion), seeking to build up its overseas presence in a market poised for rapid growth.
Hitachi's board confirmed plans Wednesday to move forward with the deal, which would be the Japanese industrial conglomerate's largest-ever acquisition. The two companies will soon conduct a final assessment of the assets of the business and are expected to reach an agreement as early as this month. The acquisition price is expected to be between 600 billion and 800 billion yen.
The move reflects Hitachi's aims to combine strengths in power generation and information technology to become a global player, at a time when rivals like General Electric shift out of the energy business amid headwinds for nuclear and fossil-fuel sources.
ABB operates the world's largest grid business. The deal would make Hitachi the world's second-largest heavy electrical equipment maker by revenue, behind only General Electric.
The plans are for ABB to spin off the unit into a separate company. Hitachi aims to invest in the new spun-off company in stages, and turn it into a wholly-owned subsidiary over several years. The move is aimed at reducing the risk from changes in the business environment.
The power grid market is growing rapidly with the spread of renewable energy and demand from emerging nations. Hitachi, whose mainstay domestic power generation business is flagging, hopes to establish a big presence in the growing market and take on global players like Siemens.
Future power generation will heavily incorporate IT. Hitachi anticipates synergies with its "internet of things" business, which can gather data on power use by businesses and homes to develop services that supply electricity tailored to demand to improve energy efficiency. As renewable energy comes into wider use, demand is growing for systems that can manage the highly variable output of solar and wind power facilities. Smart-grid technology, which conserve energy on a regional scale, is expected to develop further as well.
Hitachi therefore seeks to improve profitability to the operation by leveraging its information and communication segment, which generates over a fifth of group sales, with its power business -- something it believes ABB would not be capable of alone.
Especially attractive for Hitachi is ABB's vast penetration into emerging markets. In addition to North America and Europe, the Swiss group has markets in China, India and other emerging Asian nations. Not only are these countries rapidly building electric power infrastructure, but their demand for renewable energy is also growing.
Hitachi's power and energy operations logged sales of 450.9 billion yen for the fiscal year ended March 31, but its operating profit margin came to less than 6%. The division is highly diverse, spanning nuclear, fossil-fuel and renewable energy generation, as well as transmission and distribution systems, but it relies on the Japanese market for more than 90% of its business.
ABB's power grid operations booked about $1 billion in adjusted earnings before interest, tax, depreciation and amortization in 2017. The segment's profit margin was a relatively high 10.3%.
Hitachi aims to raise its group operating profit margin by about 2 percentage points to 10% by fiscal 2021 through acquisitions like the possible ABB deal, as well as by merging and culling some of its roughly 900 group companies inside and outside Japan.
Chinese rivals are also targeting emerging markets. State Grid Corp. of China purchased Brazilian power distributor CPFL Energia last year, and has invested in Italian and Portuguese electricity companies. The state-owned utility also has operations in the Philippines and Hong Kong.
State Grid invested a total of $19.5 billion overseas by the end of 2017, a pace it intends to maintain. Even if Hitachi secures a large share of the global market by acquiring ABB's power grid operations, it will still have to compete with Chinese and other foreign rivals on costs.
The Swiss engineering group is looking to shed its power transmission and distribution operations to generate funds and strengthen areas in which it has expertise, such as factory automation and robotics. The power grid segment has dragged down ABB's share price due to its relatively low profitability compared with these other mainstays, which log margins of about 15%. Major shareholders have pushed the company to jettison the business as a result.