Is Advent Paying A Fair Price For GE’s Distributed Power Segment?

General Electric (NASDAQ: GE) has reached an agreement to sell its Distributed Power business, which mainly makes gas turbines, to private equity investor Advent International for $3.25 billion. Our valuation methodology suggests that GE’s distributed power business could be worth as much as $4 billion, which implies that the industrial giant is selling the business at a discount of nearly 20%. Despite the growth potential of the business and the likelihood of realizing synergies, the sale presumably aligns with the company’s broader strategy to simplify operations and improve its balance sheet.

GE’s history of controversial accounting and mixed results with acquisitions hit the company hard in 2017. The company saw its revenue fall by just over 1% to $122 billion while adjusted EBITDA fell 50% to $8 billion. Correspondingly, its stock plummeted by 45% throughout 2017 the year, from $31 at the beginning of the year to under $19 at the end of the year. The negative sentiment has continued, as the company’s stock fell further to below $13 earlier this year before a modest recovery. GE’s stock price has picked up by 10-11% since the news of the deal came out. To understand GE’s distributed power business valuation better, we have created an interactive dashboard for GE’s Distributed Power business that shows how changes in its expected segment revenues, EBITDA margin and EBITDA multiple impact its estimated value.

Valuation Methodology For Distributed Power Business

The acquisition is expected to close in the fourth quarter of 2018, we expect it to have an impact on GE’s results starting in 2019. We forecast GE’s net revenues for 2019 to be $124 billion, with an adjusted EBITDA margin of 8.4% and an EBITDA multiple of 18.5x. Based on these forecasts, GE’s enterprise value (before the sale of the business) stands at around $193 billion. GE’s Distributed Power business revenue for 2017 came in at $1.3 billion (under 4% of overall Power segment revenue and around 1% of net revenues). We expect Distributed Power revenues to remain in the $1.3 billion range through 2018.

Following the sale of the business, we accordingly expect net revenues for 2019 to be around $1.3 billion lower than our prior estimates, with the EBITDA margin likely to fall 10-20 basis points as power is generally a higher-margin business relative to the company-wide margins. If you disagree with any of our forecasts, you can change the metrics in the dashboard to gauge how a change will impact its estimated value.

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