General Electric (NYSE:GE) is selling its industrial solutions business to power grids maker ABB (NYSE:ABB) for $2.6 billion. The Zurich-based engineering company announced the sale on Monday. ABB said it would finance the deal with cash and suspend its previously announced $3 billion share buyback program.
The acquisition will help ABB reinforce its position as the second-biggest supplier of electrical components behind France-based Schneider Electric. It will also allow ABB to gain worldwide access to GE’s larger base of electrical installations. The deal would strengthen its foothold in the U.S., the world’s biggest market for electrification products.
ABB says there is a potential for annual cost benefits of $200 million with the deal. ABB Chief Executive Officer Ulrich Spiesshofer said in a statement, “We are very confident this business will prosper as part of ABB.” ABB expects integration costs of $400 million over the next five years.
The deal also includes an agreement for long-term use of GE’s brand and a strategic partnership where ABB and GE will increase buying and selling from each another. Spiesshofer said of the partnership, “Without that, the economics [of the deal] wouldn’t have worked.”
The agreement was made in response to prior calls from activist investor Cevian Capital AB to break the company up. After the announcement, ABB rose 0.5 percent to 24.06 francs, as of 10:40 a.m. in Zurich. Credit Suisse and Dyal Co. were financial advisers to ABB, and Davis Polk & Wardwell provided legal counsel.
Industrial solutions is one of GE’s smaller divisions, employing about 13,000 staffers. The unit makes products like circuit breakers, switchgear, components for lighting control and power supply equipment for facilities such as data centers. ABB’s portfolio includes similar products.
GE started the bidding process for its industrial solutions business in December. The unit had sales of $2.7 billion in 2016. The unit’s operating earnings represent 6 percent of sales. In August, GE cut its price demands after ABB refused to pay the initially demanded price.
Activist investor Trian Fund Management has been putting pressure on GE to sell assets and focus on its higher-margin businesses. GE has also put its light-bulb manufacturing operations on the market. The company is now focusing more on equipment manufacturing while selling off most of its finance and consumer operations. GE says that the proceeds from the industrial solutions sale would be used to fund restructuring.