ABB shareholders demand rethink on power grids business

By John Revill and Oliver Hirt

ZURICH (Reuters) - ABB (ABBN.S) faces renewed shareholder demands to break up its sprawling business empire and to start by ditching its struggling power grids division.

The power and automation company reports first-quarter figures on Thursday, with investors braced for another tepid performance from power grids -- its largest but least profitable division, which it decided to keep in 2016.

Concerned by weak share performance since then, investors say ABB should simplify operations ranging from industrial plugs and fittings to electric motors for ships and factories.

"ABB is too big, it is too complicated and the company would gain significantly by achieving more focus," said David Samra, portfolio manager at Artisan Partners, ABB's fifth-largest shareholder with a 1.6 percent stake.

"So far we have seen no evidence of an underlying improvement in power grids, nor in the company as a whole," he told Reuters.

Artisan, which describes itself as a long-term value-oriented investor, said that ABB should follow rivals Siemens (SIEGn.DE) and Honeywell International (HON.N) in streamlining.

Siemens floated its medical equipment business (SHLG.DE) as part of its drive to attract investors for businesses outside its core industrial engineering and automation operations. It also separated its wind power operations.

Honeywell, which makes everything from jet engines to thermostats, will also divest divisions.

CEVIAN PRESSURE

In contrast, ABB insisted in 2016 on keeping the power grids business -- which makes transformers, substations and semiconductors to transmit electricity -- despite pressure from Cevian Capital, its second-largest shareholder, to spin it off.

Power Grids generated sales of $10.4 billion in 2017, accounting for 30 percent of ABB's $34.3 billion in sales.

Cevian argued that ABB was too complex and projected that separation would produce two companies with a combined share price of 35 Swiss francs.

Chief Executive Ulrich Spiesshofer said in October 2016 that ABB could reach a 35 franc share price while remaining intact. ABB stock has lost 15 percent this year to trade at about 22 francs.

The CEO, who took charge in September 2013, has supervised a more than three-year reorganisation that has yet to pay off, with the company hit by a collapse in demand from the oil and gas market.

Spiesshofer has quit some businesses to improve the power grids division's performance, selling high-voltage cables and exiting the engineering, procurement and construction business last year.

"ABB has evolved significantly as we have strengthened and streamlined the business and we are making good progress against our strategic goals," a company spokesman said. "Management and board are fully aligned."

One top-20 investor, who asked not to be named, said that Spiesshofer is under tremendous pressure, adding: "I am quite disappointed, in a very strong economy the company is treading water, if it does not perform now, when will it ever?"

However, ABB's biggest shareholder Investor AB supports the strategy.

"We believe the key focus for ABB is to execute on the transformation of Power Grids, continue to invest for the future and strengthen customer focus and cost efficiency," the Swedish investor said.

'LIMITED GROWTH'

Fidelity, which has ABB as a top-10 holding in its Swiss fund, questioned the structure, adding that 2018 could bring limited growth and struggling profitability.

"From the outside, there are some areas, like power grids, that don't really fit for many reasons -- end markets, growth drivers or margin profile," fund manager Andrea Fornoni told Reuters.

"I don't think this is something that necessarily needs to be done over the next six months, but over time a stronger view should be taken on this."

Thursday's results are unlikely to provide much respite, with Power Grids' revenues and profitability slipping, a Reuters poll showed.

Christer Gardell, managing partner at Cevian, has said he was disappointed with ABB's performance since the 2016 decision.

"The decision the board made a year and a half ago regarding the structure of ABB seems to have been wrong," he told Swedish newspaper Dagens Industri this month.

ABB shares have risen 1 percent since the decision, against a 17 percent gain for the Stoxx European industrial sector index (.SXNP).

"We want to see proof that the synergies and the advantage they [ABB] argue are there in keeping the structure intact are materialised in higher growth and profitability than for competitors," said John Hernander, portfolio manager at ABB shareholder Nordea.

(Additional reporting by Johannes Hellstrom in Stockholm and Simon Jessop in London; Editing by Keith Weir and David Goodman)