The long rumored acquisition of L+G by Toshiba has finally happened. It appears Bayard Group, the investment group that assembled the current incarnation of L+G from more than five companies, got their price ($2.3 billion) without the originally anticipated IPO, making their investors happy. Perhaps it is fitting that L+G have been picked up by a Japanese company, as this effectively rounds out the regional scope of the U.S. and European components from which L+G was built. So does this make L+G the first truly global smart grid company?
Well, no, not really, but the answer hinges on the definition of “smart grid.” Certainly companies like GE, ABB, Siemens, and even Toshiba itself, would validly claim a long-term global presence in grid infrastructure, including smart technologies. But if the definition includes smart metering, then we might have to say “maybe.” Prior to Bayard assembling the various pieces that become the “new” L+G, metering was largely a regional business. By combining L+G, Cellnet, Hunt, and a number of other firms, L+G became one of the first to seek synergies between regions - specifically North America and Europe - for smart metering. The resulting L+G corporate rationalization was a bit rocky and not without challenges, but it did ultimately result in a single integrated company, even if the smart meter market remains regionally fragmented. The Itron-Actaris merger, and similar moves by Elster, also aimed to create global scale (or at least North and South America + Europe). As part of Toshiba, L+G have the potential to accelerate smart metering growth in Asian markets, while Toshiba may leverage L+G’s relationships in North American markets.
Success here is not automatic. The big prize in Asia, of course, is China. Pike Research estimates that China will consume an average of 30 million smart meters per year over the next three years, almost three times the number in North America. Although Toshiba has a significant presence in China and L+G has made some progress with C&I meters, China has been effectively closed to all but indigenous Chinese meter vendors.
Why is globalization so important for smart meter makers? It comes down to the numbers. Unlike other high-growth high-tech items such as cell phone and PCs, the ultimate installed base of electric meters is relatively static - no need for multiple meters per household or per person. And even if smart meter lifecycles end up being shorter than the simple meters they replace, they are still far longer than other high-tech devices. So the current out-of-cycle upgrades to the electric meter installed base that is driving growth within each region will ultimately be followed by a valley where meter sales may be below the traditional once-every-twenty-years replacement rate. Pike Research has been forecasting a North American peak for 2012-2013, so a declining - though still robust - North American smart meter market is already in sight. Europe is forecasted to pick-up the pace in the second half of the decade, with overlapping and extended growth from Asia. So without a global presence, smart meter vendors will be looking at dividing up a smaller pie.
This trend may be impacting the other anticipated 2010 smart grid IPO that didn’t happen: Silver Spring Networks. Rumored to be seeking a $3 billion valuation, and without L+G’s global exposure (or revenue), the $2.3 billion sales price paid by Toshiba is likely disappointing. An interesting question is whether other Asian giants, such as Fujitsu, LG, Mitsubishi, Panasonic, Samsung, and Sony, all of whom likely have some level of interest in Smart Grid technologies, will feel compelled to make a similar move.
In the meantime, we expect that Toshiba will mostly leave the existing L+G structure alone and L+G customers should be comforted by Toshiba’s financial backing. How longer term potential market, regional, or technical synergies work out will be interesting to watch.
Photo by Bert Kaufmann/flickr/Creative Commons
Bob Gohn is an analyst with Pike Research who specializes in the smart grid.