In tune with the corporate strategy to focus on core industrial
General Electric Company
) is reportedly holding business talks with premier electronics
manufacturer Electrolux AB and other potential bidders to divest
its appliance unit. Although the conglomerate has acknowledged that
it is evaluating various alternatives to arrive at the best
possible solution for the divestiture, it has refused to divulge
any details as the discussions are currently in a nascent stage.
GE Appliance: The Divestiture Target
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
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
seems to fit 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
Swedish electronics manufacturer Electrolux has emerged as the
frontrunner in the race to acquire GE Appliance. With brands such
as Frigidaire, AEG, Zanussi as well as the namesake, it is
currently serving as the challenger to market leader Whirlpool
) in the U.S. for sale of appliances such as dishwashers, cook-tops
Of late, Electrolux has been countering dwindling demand in Europe
and Brazil due to challenging macroeconomic conditions, resulting
in a 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
New York-based start-up firm Quirky is another suitor in the fray
and has reportedly teamed up with The Blackstone Group L.P. (
) for the bidding. The firm develops its products from a host of
ideas submitted by online users and has caught the eye of several
traditional manufacturers like General Electric with its lean and
high-speed of product development.
General Electric invested $30 million last November in Quirky
and has even partnered with it to come up with innovative products
like a smart air-conditioner, whose sensors track household
activity and room temperatures to automatically adjust settings.
Insiders familiar with the negotiation process are of the view that
Quirky and its backers are likely to own a majority stake in the
acquired company, with General Electric retaining a minority
GE Appliance is estimated to be worth $2 billion to $2.5 billion on
the negotiation table. In order to focus more on its core business
activities, General Electric had earlier exited the media business
as well and increased its investments in key industrial businesses
through restructuring, state-of-the-art technology, and R&D
General Electric also spun off its consumer-lending arm Synchrony
) 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 the company
to a manufacturing-based entity with emphasis on big-ticket items
such as medical equipment and scanners. With the spin-off, General
Electric expects operating earnings from its industrial business to
aggregate 75% of the total operating earnings of the company by
It is too early to speculate whether the second attempt to divest
the GE Appliance business after a failed attempt during 2008-09
will succeed or not. For the time being, we can definitely say that
the shares of this Zacks Rank #3 (Hold) stock have created a buzz
in the industry with its divestment talks.
Want the latest recommendations from Zacks Investment Research?
Today, you can download 7 Best Stocks for the Next 30 Days.
Click to get this free report
GENL ELECTRIC (GE): Free Stock Analysis Report
WHIRLPOOL CORP (WHR): Free Stock Analysis
BLACKSTONE GRP (BX): Free Stock Analysis Report
To read this article on Zacks.com click here.