GE Appliance to be Bought by Electrolux to Defy Whirlpool

Putting all speculations to rest, General Electric Company GE recently inked a definitive agreement with premier electronics manufacturer Electrolux AB to divest its appliance unit for $3.3 billion. The divestiture is in tune with General Electric's strategy to focus on core industrial businesses. The transaction is expected to close in 2015, subject to mandatory closing conditions and regulatory approvals.

GE Appliance: The Divested Entity

The GE Appliance segment sells and services major home appliances including refrigerators, freezers, electric and gas ranges, cook tops, dishwashers, clothes washers and dryers, microwave ovens, room air conditioners, and residential water systems under the GE Monogram, GE Cafe and Hotpoint brands. The segment also includes a much smaller lighting business that is not being considered for sale.

The segment reported a profit of $381 million on $8.3 billion in sales last year, resulting in a profit margin of 4.6%. The industrial division as a whole earned a profit of $16.2 billion on sales of $103.6 billion, for a far healthier margin of 15.7%. As General Electric contemplates $4-billion worth of divestitures in the current financial year to increase its liquidity and focus on high-margin core industrial businesses, the appliance business fits the bill perfectly.

In addition, the business is exclusively focused on the U.S. markets and thereby lacks the global scale to compete with other leading electronics manufacturers like Samsung Electronics Co. Ltd. and LG Electronics Inc., leading to flatter revenues and shrinking margins. Consequently, the divestiture is likely to unlock additional value by allocating more resources to higher-growth businesses. The divestiture, valued at 8.0x trailing EBITDA (earnings before interest, taxes, depreciation, and amortization), will generate an approximate after-tax gain of 5–7 cents per share at closing.

Electrolux: The Acquiree

Swedish electronics manufacturer Electrolux managed to acquire GE Appliance against other suitors in the fray such as New York-based start-up firm Quirky, which reportedly teamed up with The Blackstone Group L.P. BX for the bidding. With brands such as Frigidaire, AEG, Zanussi as well as the namesake brand, Electrolux is currently serving as the challenger to market leader Whirlpool Corp. WHR in the U.S. for sale of appliances such as dishwashers, cook-tops and refrigerators.

Of late, Electrolux has been countering dwindling demand in Europe and Brazil due to challenging macroeconomic conditions, resulting in soft organic growth in the region in 2013. In order to offset this, the company is focusing on improving its revenues from the U.S., which serves as its largest single-country market. The acquisition of GE Appliance business will enable Electrolux to gain additional mileage in the region to strengthen its position in the market. With iconic GE Appliance in its kitty, Electrolux's annual sales in North America are expected to double to $10 billion. In addition, the acquisition is likely to yield $300 million in annual cost savings from a combined resource pool. Post-acquisition, Electrolux will use the GE Appliance brand name for about 40 years as per the terms of the agreement, offering General Electric free publicity through household items.

The Transaction Rationale

In order to focus more on its core business activities, General Electric had earlier exited the media business and increased its investments in key industrial businesses through restructuring, state-of-the-art technology, and R&D initiatives. The company won unanimous approval in June this year from French conglomerate Alstom to acquire its Power and Grid businesses in a $16.9 billion deal. Power & Water is one of the high-growth, high-margin industrial segments of General Electric and is integral to its core businesses that include Oil & Gas, Power, Aviation and Healthcare.

General Electric also spun off its consumer-lending arm Synchrony Financial SYF in an initial public offering IPO in July as the first concrete step to shrink its finance business by 2015. The strategic move is arguably the biggest step in restructuring GE Capital's portfolio to shield the parent company from intense market volatilities that plagued the market during the 2008-09 financial crisis. The spin-off will realign the corporate strategy of General Electric to a manufacturing-based entity with emphasis on big-ticket items such as medical equipment and scanners.

With such strategic moves, this Zacks Rank #3 (Hold) stock expects operating earnings from its industrial business to aggregate 75% of the corporate operating earnings by 2016. We remain impressed with the focused attempts of General Electric to restructure its portfolio.