GE Intensifies Focus On Infrastructure Businesses With Sale Of Its Appliances Unit

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Last month, we had written an article titled ‘GE is mulling sale of its appliances unit‘ in order to intensify focus on its higher margin and higher growth infrastructure businesses which include oil & gas, power, aviation and healthcare. On Monday, September 8 2014, GE (NYSE:GE) announced sale of its appliances unit to the Swedish appliances maker, Electrolux. GE has agreed to sell its century-old consumer appliances unit to Electrolux for $3.3 billion in cash. This deal values the appliances unit at 8 times the unit’s last 12 months’ EBITDA. [1] In our opinion, this valuation is fair, given the appliances unit’s persistently low margins. For the past 5 years, operating margin at GE’s appliances and lighting segment, which includes the appliances unit, has remained below 5%. [2] GE tried to sell this unit back in 2008 as well, but talks with potential buyers at the time got stalled due to the onset of the financial crisis.

We currently have a stock price estimate of $28.33 for GE, about 8% ahead of its current market price.

See our complete analysis of GE here

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Appliances Unit Sale Will Help GE Increase Focus On Its Higher Margin Infrastructure Businesses

GE’s appliances unit makes consumer products such as dishwashers, refrigerators and ovens, and over the last many decades, this unit played a key role in establishing the brand GE as a household name. But, in recent years, returns from this unit increasingly lagged behind returns from GE’s other industrial businesses. Operating margins at GE’s other major industrial businesses including power & water , oil & gas, aviation and healthcare remained consistently in the double-digits, with margins in aviation and power & water segments touching nearly 20%. [2] In comparison, margins at the appliances unit remained in low single-digits. Thus, we figure the sale of appliances unit will enable GE to intensify focus on its higher margin industrial businesses.

This move will also help GE’s push towards expanding the share of its industrial earnings to 75% in its total earnings by 2016. To achieve that target, GE has already made significant portfolio changes this year. In June, the company finalized purchase of Alstom’s power and grid businesses. Thereafter, in August, the company completed the IPO of its North American retail finance unit, Synchrony Financial, in a planned exit from that business. This sale of the low-margin appliances unit is another step in this series, which will help GE focus its portfolio on higher margin and higher growth industrial businesses.

For Electrolux, the acquisition of GE’s appliances unit will enable the company to gain a strong foothold in the U.S. market, in which it currently lags behind rival Whirlpool. The acquisition will also allow Electrolux to reduce its dependence on Europe, which will likely allow for moderate growth in coming years.

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Notes:
  1. GE agrees to sell appliances business to Electrolux for $3,3 billion, September 8 2014, www.ge.com []
  2. GE’s 2013 10-K, February 2014, www.ge.com [] []