ZURICH Swiss industrial group ABB ABBN.VX is to buy U.S. solar energy company Power-One Inc PWER.O for about $1 billion, betting that growth in emerging markets will revive a sector ravaged by overcapacity and weakening demand in recession-hit Europe.
The world's biggest supplier of industrial motors and power grids said on Monday it had agreed to pay $6.35 per share in cash for Power-One, the second-largest maker of solar inverters that allow solar power to be fed into grids.
The offer price is 57 percent above Power-One's closing price on Friday, boosted by $266 million in net cash held by debt-free Power-One. Stripping out its cash pile, Power-One's enterprise value stands at $762 million, valuing the bid at a more modest 6.4 times 2012 core earnings.
As solar power gets closer to competing with conventional forms of energy such as gas and coal, demand for solar panels that harness the sun's energy is rising.
The same goes for solar inverters, which are needed to feed that power into large electricity grids from commercial solar panel installations and smaller units on factories and homes.
"We consider the acquisition of Power-One as a smart strategic move for ABB to broaden its solar product portfolio at the right time," Vontobel analysts said.
The solar inverters business is one of the last profitable parts of the solar value chain - mainly due to its relatively complex technology - while makers of cells and panels have suffered massively from the fact that their products are easy to replicate.
Peers like Germany's Siemens (SIEGn.DE) and Bosch ROBG.UL recently ended ventures in the solar industry after oversupply, weak economies and a cut in government subsidies triggered a collapse in demand for solar panels and prices slumped, leading to a wave of insolvencies in the industry.
Even makers of the solar inverters have suffered.
Germany's SMA Solar (S92G.DE), the world's biggest maker of the components, reported a 58-percent drop in 2012 operating earnings last month and said sustained lower prices from competitors could severely impair its business.
However, ABB believes the solar market is set to grow its way out of overcapacity as electricity costs rise and falling prices of solar power systems make it a more competitive source of energy.
ABB is buying into solar energy now because it sees a shift in demand towards emerging markets such as China and the Middle East, said Ulrich Spiesshofer, head of ABB Discrete and Motion, the business that includes ABB's solar activities.
The company took a 35 percent stake in Germany's Novatec Solar in 2011.
"Solar is, long-term, the fastest-growing renewable generation market in the world. ABB believes in this market," Spiesshofer said in a company video.
At 7:52 a.m. EDT, ABB shares were up 0.9 percent at 20.11 Swiss francs, outperforming an almost flat European industrial sector index .SXNP. SMA Solar shares were up almost 9 percent.
The solar inverters market is forecast to grow by more than 10 percent per year until 2021, ABB said. Solar inverter industry revenues reached $7 billion last year, according to research firm IHS.
Camarillo, California-based Power-One's market share in the inverter industry has doubled to 10 percent since 2009, while SMA Solar's has dropped to 25 percent from 38 percent, ABB said in a presentation.
ABB Chief Executive Joe Hogan said the deal should boost net income within a year. He said the company had no interest in buying solar panel or machinery makers.
Sarasin analyst Martin Schwab said the bid price for Power-One seemed high, but that the deal might pay off. Vontobel analysts called the price reasonable, given the target's net cash position and positive operating cash flow.
ABB said it would pay for the transaction from its own funds and that it included Power-One's net cash of $266 million.
Subject to shareholder and regulatory approval, the deal is expected to close in the second half of 2013.
Power-One employs almost 3,300 people, mainly in China, Italy, the United States and Slovakia and had sales of around $1 billion in 2012. The firm posted a fourth-quarter loss per share in January.
Credit Suisse CSGN.VX acted as financial adviser to ABB, and Cleary Gottlieb Steen & Hamilton LLP acted as legal adviser. Goldman Sachs & Co. (GS.N) acted as financial adviser to Power-One, and Gibson, Dunn & Crutcher LLP as legal adviser.
(Additional reporting by Katharina Bart and Christoph Steitz; Editing by Mark Potter and Tom Pfeiffer)