ZURICH Swiss engineering group ABB ABBN.VX is to buy U.S. industrial motors firm Baldor Electric Co BEZ.N for $3.1 billion to capitalize on a global push for energy efficiency and boost its North American presence.
ABB agreed to pay $63.50 a share, a 41 percent premium to Baldor's closing price on November 29 and an offer analysts regarded as pricey. Under the deal, ABB also assumes $1.1 billion in net debt.
Baldor shares jumped 40 percent in early New York trading to $63.24, just below the offer price.
"The acquisition of Baldor would make sense strategically and is therefore welcome," Vontobel analyst Panagiotis Spiliopoulos said in a note. "Yet the recommended purchase price is at the upper end of the economically defensible range."
Shares in ABB, which makes equipment for oil, gas and utilities companies, were down 0.1 percent at 19.51 Swiss francs, at 1456 GMT.
ABB expects synergies to yield more than $200 million annually to earnings before interest, tax, depreciation and amortization (EBTIDA) by 2015. A deal termination fee was set at $105 million.
The deal gives Baldor an enterprise value of about 11.1 times estimated 2011 EBITDA, a "steep valuation" compared to ABB's own EV/EBITDA ratio of 7.3 times, ING analyst Axel Funhoff said in a note.
ABB's buy comes as takeover activity is picking up globally as firms look to expand amid limp economic growth, with the value of deals so far this year already exceeding last year's $2 trillion, according to Thomson Reuters data.
MORE BUYS AHEAD?
ABB said the deal with Baldor would position it to profit from an increased demand for energy efficiency, noting that industrial motors use a quarter of all electricity generated.
New rules for energy efficiency go into effect next month, requiring buyers to choose an energy-efficient motor for certain applications. With the new models commanding a higher price, the rules effectively act as a price increase.
ABB said U.S. energy efficiency legislation should drive 10 to 15 percent growth in the U.S. high efficiency motors market and it expected similar regulations in 2011 for Canada, Mexico and Europe, with Australia, China and others likely to follow.
Analysts had been expecting ABB, whose products include circuit breakers and industrial robots, to do a deal -- possibly in automation or in the United States -- given its large cash pile.
Chief Executive Joe Hogan said ABB remained on the prowl.
"We still have excess cash," Hogan said in a conference call for journalists, declining to give a precise figure. "So we'll continue to look for opportunities out there."
ABB had $5.3 billion in net cash at the end of the third quarter. Baldor will fit into ABB's automation portfolio, which makes up about half of group revenues.
ZKB analyst Richard Frei said he thought ABB was now quite well covered in automation, but that it might have some blind spots in other markets. "Maybe the focus will go more in the direction of power, though I wouldn't exclude smaller acquisitions in automation," he said.
Earlier this year, ABB raised its stake in its Indian subsidiary and spent more than $1 billion on U.S. software group Ventyx.
But it pulled out of bidding for British power supply systems maker Chloride after rival U.S. suitor Emerson Electric (EMR.N) offered a higher price.
TARGETING U.S. MARKET
ABB said it would keep the current management of Baldor, which employs about 7,000 people and reported revenue of $1.29 billion in first nine months of 2010.
Fort Smith, Arkansas-based Baldor gets about 80 percent of its sales from the United States in markets like mining and farming. The 90-year-old company also makes generators, drives and mechanical power transmission components.
Baldor, whose rivals include General Electric (GE.N) and Regal Beloit Corp (RBC.N) as well as Germany's Siemens (SIEGn.DE), paid $1.8 billion in 2007 for Rockwell Automation's (ROK.N) power systems business.
"ABB has never been able to get into the North American market with small motors, and Baldor basically delivers that," BB&T Capital Markets analyst Holden Lewis said. Regulatory hurdles are unlikely for the deal, he said.
Lewis added that a company like Siemens may now want to "take a good hard look" at Regal-Beloit, since one avenue into the U.S. motors market is closed.
"It does raise scrutiny for anyone who wants to get into the small motors business," Lewis said.
Regal-Beloit shares jumped 4.8 pct to $61.08. A.O. Smith Corp. (AOS.N) rose 3.9 percent to $38.53.
ABB, whose roots date back to a 19th-century company that made steam turbines, expected the deal to close in the first quarter of 2011 and to be earnings accretive in the first year.
Citigroup (C.N) served as adviser on the deal to ABB while UBS UBSN.VX advised Baldor.
($1 = 0.7606 euro)
(Additional reporting by Quentin Webb in London, Nick Zieminski in New York; Editing by Dan Lalor, Hans Peters, Dave Zimmerman)