General Electric: Thoughts On The 'Reworked' Wabtec Deal

Jan. 28, 2019 7:07 AM ETGeneral Electric Company (GE)WAB79 Comments
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  • General Electric and Wabtec modified their asset merger agreement.
  • I believe that both companies should be viewed a winners under the new agreement, but it is a different story for GE shareholders.
  • I plan to stay long both General Electric and Wabtec, and I look forward to reading your thoughts about the new deal.
  • This idea was discussed in more depth with members of my private investing community, Going Long With W.G.. Start your free trial today »

On January 25, 2019, General Electric (NYSE:GE) disclosed that it modified the terms of the asset merger agreement with Westinghouse Air Brake Tech. (WAB), or Wabtec. After this news hit the wire, GE shares were up almost 4.5% but WAB shareholders were not as lucky (WAB shares finished the trading day down slightly over 3.5%).

ChartData by YCharts

Shareholders of both companies will be materially impacted by the disclosed modifications to the deal but, in my mind, the market got it wrong, at least in the short-term. To me, WAB walked away with a great long-term deal (majority stake but will have to give up cash in the new future) but I believe that GE (the company) will also greatly benefit from the restructured agreement. As such, GE's management team slapped shareholders in the face by reworking a deal that now directly benefits others more than them (i.e., GE the company and Wabtec are the real winners) but I believe that the slap was a necessary evil.

A Win-Win (For The Companies)

Let's first review exactly how the deal changed:

Old Deal Modified (or Re-Structured) Deal
WAB shareholders would have owned ~49.9% of the new entity WAB shareholders will own ~50.8% of the new entity
GE (the company) would have owned ~9.9% of the new entity GE (the company) will own ~24.9% of the new entity
GE shareholders would have owned ~40.2% of the new entity (and the transaction would have been a tax free spinoff) GE shareholders will own ~24.3% of the new entity (the transaction will now be considered a taxable dividend)
GE (the company) will receive $2.9B in cash at closing GE (the company) will receive $2.9B in cash at closing
Deal was expected to close in "early 2019" Deal will close

This article was written by

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Our President and CIO is a CPA with experience in public accounting and the financial services industry. He earned his Master of Accountancy degree in 2008 and his B.S. in Business Management in 2007. He is also a Level III CFA candidate. He has been intrigued by the market from the start. Over the years, he has learned that long-term investing is a discipline that, if followed, will help contribute to building lasting wealth. As such, most of our articles will be about the investments that we plan to hold for at least 3 to 5 years, as long as the company's story does not change. As a Seeking Alpha contributor, our main goal is to write about the companies that are key to our portfolio with the hope of promoting discussion (for or against the investment) from others within the SA community.Please visit our website for more information about W.G. Investment Research LLC.

Disclosure: I am/we are long GE, WAB, SYF. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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