GE Holding Talks with Electrolux to Sell Appliance Unit - Analyst Blog

In tune with the corporate strategy to focus on core industrial businesses, General Electric Company ( GE ) 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 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 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 businesses.

The Suitors

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 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 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 market.

New York-based start-up firm Quirky is another suitor in the fray and has reportedly teamed up with The Blackstone Group L.P. ( BX ) 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 portion.

Moving Forward

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 initiatives.

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 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 2016.

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.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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