GE (NYSE:GE) is at it again. It sold a 51 percent controlling stake in NBC Universal to Comcast (NASDAQ:CMCSA) in 2011, completed the sale of the other 49 percent in early 2013, and last year decided to spin-off part of GE Capital into Synchrony Financial (NYSE:SYF). Now, it the company is looking to divest its appliance business. Last year, I wrote that the Capital business spin-off would likely provide value to shareholders in the long-term. It seems there could be similar potential in this deal. Let's dive in.
GE's home appliance business, which markets the GE Profile, GE Artistry, GE Cafe, and Monogram brands, sells washers and dryers, refrigerators, and other appliances direct to consumer as well as through stores such as Home Depot (NYSE:HD) and hhgregg (NYSE:HGG).
GE's earnings from the Appliance and Lighting segment grew by 23% last year, driven by both higher volumes as well as elevated selling prices. 23% growth is an impressive number, and shows that the business is still rebounding strongly from the recession; a closer look, however, reveals that the uptrend does not seem sustainable. Revenues in the segment only grew 5% last year. With limited revenue growth, margins can only increase to a limited degree, limiting earnings growth potential. A quick look online also uncovers poor customer/service quality reviews for GE's most recent appliances.
The value for the segment could be at an all-time high, and with CEO Jeffrey Immelt increasingly focusing on high-growth and sustainable businesses, now seems be a perfect time for a sale.
The influx of cash from the divestiture of this segment would provide GE with liquidity and capital to allocate to core businesses, possibly boosting shareholder value through business growth.
Potential buyers, sale details:
"GE is evaluating a wide range of strategic options for our appliances business, including discussions with Electrolux and other interested parties" - Seth Martin, GE spokesperson
Though there are several potential buyers for GE's Appliance business, Electrolux (OTCPK:ELUXY) (ELUXB), the number two appliance maker in the U.S., has already engaged with GE about an acquisition and seems to be the frontrunner. Other reports from Bloomberg and CNBC mention Quirky, Inc. (in which GE invested in 2013), Samsung (OTC:SSNLF) (OTC:SSNGY), LG (NYSE:LG), and even Whirlpool (NYSE:WHR) as potential suitors as well.
Talks with Electrolux seem to be the most progressed. Although the company released a statement saying "No agreement has been reached, and there can be no assurances that an agreement will be reached," Electrolux would make sense as a purchaser for GE's Appliance business.
Electrolux already derives almost half of its revenues from the Americas - this established presence would assist in the quick integration and consolidation of assets.
A combined company could greatly reduce operating expenses while sharing revenues, increasing margins and driving earnings growth. Electrolux would likely be willing to pay a premium for GE's appliance business - the question is how large of a premium GE would accept.
How this could impact GE shareholders:
Last year, after completing the sale of NBC Universal, GE was able to return $18.2 billion to shareholders in the form of buybacks and dividends. $50 million in returns per day indicates that the management team seems aligned with shareholder interests.
As of January 1, 2014, GE still has $12.3 billion remaining on its share repurchase program. A sale of the Appliance business (especially at a large premium) would accelerate this process, reducing the share count much more quickly. (If you're looking to learn about share buybacks, contributors YCharts and Josh Arnold recently wrote informative articles on the subject).
Bloomberg reports that GE is looking to divest about $4 billion this year, according to Jeff Bornstein, the company's CFO. If you have faith in GE's management team, this activity will further drive shareholder value.
Tim McAleenan wrote how continued divestitures allow GE to be more easily analyzed from a dividend standpoint, and could even lead to 10% annual dividend growth.
Keep watch on this deal, I expect the companies to reach an agreement, and for GE to be able to increase share repurchases as well as initiate dividend hikes.
Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.