BCS Barclays PLC

FRANKFURT—In a rare move highlighting European blue chips' vulnerability to activist investors, two top shareholders in Switzerland's ABB Ltd. are urging the engineering giant to spin off its power-grids unit to streamline operations.

Managers at Swedish activist fund Cevian Capital and U.S.-based Artisan Partners say the move would lift shareholder value.

A spinoff "would lift shareholder value by up to 60% -- raising the share price to about CHF35—because it would lift the conglomerate discount and reduce complexity," said Cevian co-founder Lars Fö rberg in an interview.

Mr. Fö rberg said big conglomerates tend to make decisions too slow and that ABB has long lagged behind rivals in terms of profitability.

A spokeswoman for ABB said the company is reviewing its power grid operations and would give an update on the process on October 4.

Mr. Fö rberg's comments are unusual because Cevian rarely makes its views public. It also shows that investors, including Cevian, are taking a more activist stance in Europe and increasingly investing in large companies that are flush with funds in the ultralow interest rate environment.

Mr. Fö rberg said Cevian is being vocal because there has been widespread speculation regarding its stance on ABB. Cevian is ABB's second-largest shareholder, with a stake of roughly 5.4%.

He added he'd prefer a spinoff of the unit to ABB's existing shareholders, rather than an outright sale, because a spinoff is less risky and easier to manage. "We also don't see dis-synergies in a breakup scenario," Mr. Fö rberg said, referring to issues such as lower revenues for either entity or the spun-off unit being too small to be profitable.

"There is a long list of successful demergers or spin offs from conglomerates because smaller entities increase the focus on improving performance," said fund manager David Samra from Artisan Partners Limited Partnership. Mr. Samra said Artisan holds a 2.5% stake in ABB.

ABB's power grids unit, which also makes transformers and supplies utility and grid companies, posted operating profit of CHF452 million in the first six months this year on CHF5.3 billion in revenue. That was nearly one-third of ABB's total revenue.

Not all market participants agree it would make sense to spin the unit off to existing shareholders.

"The ongoing transformation of the electricity value chain plays into the hands of ABB," Barclays said in a recent note. "We are not believers in a split-up of the company, but would like more details on which areas in power grids offer profitable growth and which areas are structurally challenged."

Some Industry experts contest the view that power grid has little in common with other operations at ABB, saying there would see significant loss of synergies in case of a breakup.

ABB's share price has risen 35% over the past five years, underperforming U.S. rivals Rockwell Automation Inc. and Honeywell International Inc. Both companies' share prices more than doubled over the same time, while shares of European rivals Siemens AG and Schneider Electric S.E. rose more than 50%.

Activist campaigns against big European companies are increasingly common. J.P. Morgan Chase said in a recent note that the value of such campaigns—nearly 100 in total -- grew 62% in the 12 months through June 30, faster than any other region of the world.

The note said major activist funds are "now turning their attention to large and mega-cap targets where they can build multibillion-dollar positions and promote sophisticated corporate strategy agendas."

Write to Eyk Henning at eyk.henning@wsj.com

(END) Dow Jones Newswires

September 13, 2016 13:35 ET (17:35 GMT)

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