General Electric (NYSE:GE) is reportedly in talks to sell its appliance unit to Electrolux (OTCPK:ELUXY) and Quirky in a deal that could have a price tag of $2 billion. GE has been trying to sell its appliance business for years, and as an interested bystander, I hope this deal goes through. In this article, I'll take a quick look at the deal and what it could mean for GE shareholders.
As a note, any data referenced in this article was sourced from company's SEC filings.
To begin, GE doesn't break out its appliances business into a separate segment, so the details of the transaction are harder to evaluate. However, we do know some things about the appliance business from GE's financials, since it is part of the Appliances & Lighting division. This division had $4.2 billion in assets at the end of last year, and while we can't know what assets would be sold in the deal, I also have to imagine much of those assets are encumbered by debt of some sort. GE has never been shy about borrowing to finance fixed assets, and I'm sure that is the case here. It will be interesting to see if GE ends up giving away its fixed assets in the deal or if a fair price is reached; it will all depend on the details.
Last year, I profiled each of GE's operating segments in an attempt to assign a sum-of-the-parts valuation to the entire company business by business. The Appliance & Lighting segment was called Home & Business Solutions at the time, and when I profiled it last November, I assigned a value of $3.8 billion to the entirety of the segment, based upon 12 times EBIT. As I said before, it is impossible to know exactly what GE is selling, because appliances are merely a piece of that segment, but I have to think that $2 billion for half of it is a decent price.
Consider that the A&L segment produces 5.7% of total company revenue but only 1.6% of company profit; operating margins at this segment are terrible at less than 4%, standing in stark contrast to the ~20% operating margins at other GE segments. In other words, this business is awful for GE; it produces no growth, and the margins are pathetic. GE spends a lot of resources making appliances and lighting products that produce a lot of revenue but very little profit. I argued in my GE series linked above that the A&L division should be sold or otherwise divested, because it doesn't fit with the rest of GE anymore. Perhaps there was a time when the A&L business was a good fit, but it isn't right now, and GE should get rid of it to the first willing buyer.
I love the news of the deal to sell the appliances business. Given the data that we know from GE the appliance business is one with no growth and razor-thin operating margins. While the business is profitable, it is nowhere near as efficient at producing profit from its revenue as GE's other segments, and also doesn't fit with GE's strategic direction going forward. In other words, it's about time GE sold off its appliances division, and the $2 billion price tag seems pretty fair.
I would like to have seen it a bit higher, but getting rid of this anchor will let the remainder of GE achieve a higher earnings multiple. Consider that removing a segment with no growth and low operating margins will automatically increase those metrics for the whole company; GE could be getting an earnings multiple reset higher on this news. Don't expect anything huge, but another one-time forward earnings on its multiple would create some shareholder value, not to mention the savings from not having the appliance business distract GE from its businesses that actually matter. I love this deal, and it's not a moment too soon for GE shareholders.
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