Hitachi to buy Finmeccanica's rail biz

Feb 24, 2015, 3:51 PM EST
Hitachi chief executive Hiroaki Nakanishi speaks during a press conference at the company's headquarters in Tokyo on February 24, 2015. Hitachi said on February 24 it would buy the rail and traffic signal businesses of Italy's Finmeccanica, in a deal that could reach more than $2.0 billion as it looks to take on global rail giants.

Japanese conglomerate Hitachi signed a binding agreement on Tuesday to buy Italian defense group Finmeccanica’s rail businesses for $2.2 billion. The Wall Street Journal notes that the Italian company looks to lower debt and concentrate on its core aerospace and defenses businesses. Hitachi will pay €773 million ($876.1 million) for Finmeccanica’s 40% stake in rail signaling operator Ansaldo STS and €36 million for unprofitable train manufacturer AnsaldoBreda, the two companies said in a statement.
Following the closing of the deal, expected by the end of the year, Hitachi will launch a mandatory tender offer on Ansaldo STS’s publicly traded shares which could boost the Japanese company’s total payout to as much as $2.5 billion. After restructuring to scale back its consumer electronics business, the Japanese conglomerate has been pushing to expand abroad, in areas ranging from train building to power-generation equipment to reduce its reliance on its slow-growing domestic market. The company moved the headquarters of its rail division to London from Tokyo last year after winning an order to supply high-speed trains in Britain.
State-controlled Finmeccanica has been trying to sell loss-making train unit AnsaldoBreda and its controlling stake in rail-signaling company Ansaldo STS (STS.MI) for almost four years, writes Reuters, deeming the business to be too small to compete on its own in foreign markets. However, corruption scandals and political meddling delayed the process, prompting ratings agencies to downgrade the Italian group's 4.1 billion euros of debt to junk status, increasing its financing costs and damaging its international competitiveness. The Hitachi deal, which will cut Finmeccanica's debt by 600 million euros, is expected to boost investors' confidence in Chief Executive Mauro Moretti's ability to turn the company around but analysts said they do not expect an immediate upgrade to its ratings. Moretti said at a press conference late on Tuesday earnings targets for this year would be revised higher and credit ratings would improve after the sale.
Hitachi, which makes nuclear power equipment, rail systems and industrial machinery, has sought to expand overseas as most of Japan’s nuclear power plants remain shut after the 2011 earthquake and tsunami led to radiation leaks at a facility on the northeast coast, according to Bloomberg. Hitachi plans to use cash on hand as much as possible and isn’t thinking of issuing new securities to finance the deal, Chairman and Chief Executive Officer Hiroaki Nakanishi said at a press briefing in Tokyo. The Tokyo-based company has spent about $3.8 billion on acquisitions over the past three years, including the AnsaldoBreda deal, with $3.3 billion spent on companies in Europe.