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Hello sunshine

22 April 2013 By Quentin Webb

ABB’s contrarian push into solar energy looks smart. The Swiss group is buying Nasdaq-listed Power-One for $1 billion in cash – a fully priced deal, given the solar industry’s current financial misery. But ABB insists Power-One occupies a sweet spot. That sounds plausible, and long term, the deal should add up.

The backdrop is gruesome. A glut of cheap Chinese kit has bankrupted firms from Germany’s Q-Cells to China’s own Suntech. Power-One does not make solar panels themselves, but solar inverters, which convert solar power to grid-ready electricity. But even here the picture is grim, especially in Europe, thanks to huge subsidy cuts and tariffs on Chinese imports. So bigger rival SMA Solar Technology warns the global inverter market will shrivel 19 percent in 2013.

The turmoil makes valuation tricky. ABB trumpets a reasonable-looking enterprise value (EV) of 6.4 times 2012 EBITDA, once net cash of $266 million is included. But analysts polled by Starmine forecast EBITDA will plunge from $120 million last year to about $70 million this year – a pretty rich current-year EV/EBITDA multiple of 10.7 times.

Look further out, though, and the sunlit uplands are dimly discernible. Upstarts will have more trouble competing in inverters than in panel-making. And demand for inverters should ultimately grow strongly, once cheaper panels make solar energy competitive with conventional energy sources.

ABB should also be able to reap cost savings and extra sales, by plugging Power-One into its global network. It can spend to reduce the business’s heavy reliance on Europe – a switch Power-One would struggle to fund on its own. This could yet prove to be a shrewdly timed acquisition.

This is the third sizeable U.S. company ABB has taken over in as many years, after Baldor and later Thomas & Betts, worth roughly $4 billion apiece. Under Chief Executive Joe Hogan, ABB has expanded in the United States and cut its dependence on tougher businesses like transformers. The market does not seem entirely convinced: ABB still trades 19 percent below its median 10-year price-earnings multiple. But at least Hogan is taking action, while other European blue-chips are still hunkering down.


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