FINMECCANICA SELLS ANSALDO TO HITACHI FOR MORE THAN $2 BILLION

Hitachi, a Japanese conglomerate, will pay €773 million ($850 million) for Finmeccanica’s 40% stake in Ansaldo STS: under Italian law, this type of operations requires a mandatory tender offer in order to be finalized. The Tokyo-based company will pay €9.65 for each Ansaldo STS share, equivalent to a 9.2% premium and it will launch a tender offer to buy the other shares.

In addition, Hitachi will also pay €36 million ($45 million) for AnsaldoBreda; only a factory in Sicily and certain residual contracts have been excluded from the final deal.

The all-cash deal will see Hitachi cherry pick the best parts of Ansaldo’s business.

The deal is one of the largest foreign investments in Italy since the European debt crisis and comes amid signs Italy’s economy is pulling out of its deep recession.

Industry overview

In 2001 Ansaldo Trasporti and Breda Costruzioni Ferroviarie, two of the oldest and most important Italian industrial corporations, both part of the Finmeccanica Group, merged creating AnsaldoBreda. AnsaldoBreda is known to be the main Italian player in rail transport engineering industry, while Ansaldo STS is specialized in designing and manufacturing railway-signaling systems.train

On the other hand, Hitachi was founded in 1910 by electrical engineer Namihei Odaira. The company’s first product was Japan’s first 5-horsepower electric induction motor, developed mainly to be used in copper mining. Odaira’s company soon became the domestic leader in electric motors and electric power industry infrastructure.

The rail industry has recently seen few notwithstanding mergers and Hitachi’s purchase can be consider in line with foreign consolidations started in 2012: in that year, Siemens AG announced the purchase of Invensys Plc’s rail-signaling business. Less than a year after, CSR Corp. Ltd. agreed to acquire the other smaller competitor China CNR Corp. Ltd., while Alstom SA plans to buy the rail-signaling business of General Electric Co. as the U.S. company buys the power-equipment units of the French train maker.

More specifically, AnsaldoBreda has four plants in Italy (located in Naples, Reggio Calabria, Palermo, and Pistoia), it employs more than 2,300 workers and it is considered a world leader in driver-less metro trains: it delivered the first system of this kind to Copenhagen in 2002. It is currently building 50 Frecciarossa ETR 1000-model high-speed trains for the Italian Ferrovie, its main customer, in a €1.5 billion ($1.7 billion) contract in cooperation with Canada’s Bombardier Inc.

In order to go beyond the Japan’s market shrinks, Hitachi is already investing in a plant in northeast England in a big strive to expand within Europe. Given the different nature of the Hitachi’s divisions, the Japanese industrial group focuses its activities also on nuclear power equipment and industrial machinery. Over the past three years, the Tokyo-based company has spent about $3.8 billion on acquisitions if the AnsaldoBreda deal is included (out of this amount, $3.3 billion have been spent on companies in Europe) and it has been able to rely on its huge amounts of liquidity to finance these deals.

Drivers of the deal

As previously stated, the Hitachi’s acquisition comes after a sequence of several important deals in the same industry and therefore other important changes are foreseeable in the near future.

One of the most important drivers of the deal is that Ansaldo STS has long made signal systems for North America and Europe and this is a good fit for Hitachi, given the fact that Japanese signal systems are incompatible with foreign railways. Ansaldo’s manufacturing plants in Italy will help to provide for Hitachi Rail new electric and bi-mode trains in the UK. It is fundamental to win Chinese competition: China’s CNR and rival CSR Corp plan to merge to create a $26 billion company, the world’s largest train maker by sales thanks to its domestic market, which is now looking to export markets for its high-speed trains. Hitachi has been looking for a bigger global base. The transaction sends a clear message that the company’s focus is on global growth and especially on developing the European market. This is also a good chance to gain strength in a large market, starting with railways industry where Japan has always been a leading country.

It is note that this foreign acquisition goes along with the trend of aggressive exports of social infrastructure that are still benefiting of the guidelines driven the Abenomics.

This operation seems to be advantageous also for Finmeccanica: in fact, it is in line with the policy of debt reduction and the Hitachi deal will cut Finmeccanica’s debt by €600 million, corresponding to 15% of the total financial liabilities. Finmeccanica has about €5 billion of outstanding bonds, with coupons ranging from 4.375% to 8 %.

Following this, it should also decrease the cost of financing since it would improve the burden of debt and rating grade.

This operation should boost the position of the Japanese conglomerate and this will allow competing more efficiently with the other top three train makers:

-Canada’s Bombardier

-Germany’s Siemens

-France’s Alstom

With this deal, Finmeccanica becomes a simple aerospace and security company. Finmeccanica Chief Executive Officer Mauro Moretti is selling the rail unit to focus on faster-growing helicopter, aerospace and defense-electronics businesses: cutting debt has always been one of his core goal.

Transaction Terms & Structure

Comparison - Hitachi (blue), Finmeccanica (purple), Nikkei index (red) and Industrial sector (green)

Comparison – Hitachi (blue), Finmeccanica (purple), Nikkei index (red) and Industrial sector (green)

Hitachi bought Ansaldo for $2.2 billion from Finmeccanica. They bought Ansaldo Breda and Ansaldo STS, which together make up Ansaldo. After a downward adjustment by the amount of dividend per share distributed Hitachi ended up doing the deal with Finmeccanica for $10.22 per share. Hitachi will acquire a 40% stake in Ansaldo STS from Finmeccanica which Italian law requires a mandatory tender offer for the rest of the company (60%). The two were performing at a loss for Finmeccanica although Ansaldo Breda currently has a $1.4 billion contract to build a railway system in Honolulu: the deal was driven by CEO Mauro Moretti’s interest in Japanese investors and the competitive advantage that Hitachi can bring to fruition through Ansaldo. Now they have access to high-speed train manufacturing in Europe and other profitable parts of Ansaldo’s former infrastructure. Currently Hitachi is paying $865 million for Ansaldo STS ($10.80/share –tender offer for the rest as per Italian law), the deal cut Finmeccanica’s debt by $671.5 million –Ansaldo’s by 15% (at the same time as the value of the Finmeccanica’s debt was downgraded to junk) net total capital gain $279 million. Hitachi essentially has to pick the best parts of Ansaldo’s business, which satisfied Moretti who refused the bids from Chinese company Insigma that was also backed by the Chinese government through the Bank of China.

Citibank was Hitachi’s financial advisors, while Finmeccanica was advised by Mediobanca and UBS.


To contact the authors of this story:

Davide Magni            davide.magni@studbocconi.it

Andres Ibarguen       andres.ibarguen@studbocconi.it