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GE FETCHES POOR PRICE IN APPLIANCES DIVESTITURE

Our thoughts on GE's sale of its appliances business to Electrolux.

Key Points

We are underwhelmed with the $3.3 billion price tag, which is leaving about $2 billion in value on the table.

Unfinished business - "Strengthening" the business from awful to poor is not a win. Years of neglect allowed margin to deteriorate from 12% to nil then back to 5-6%. Getting EBIT (not EBITDA, EBIT) back to $650-750 million would drive cash flow and a better exist price.

Timing - see chart to left. Do YOU think this is the right time to sell? Improving residential outlook, plus $1.6 billion of revenue in fast growth Mexico (pro-rata 48.4% ownership in MABE) means GE is selling at least two years early.

Valuation - on EV/revenue ELUXB trades at 0.87x, WHR 0.73x and GE Appliances at only 0.46x (including adjustment for MABE). We would prefer to see a) fix EBIT margin - hit at least 10%, b) await/capture at least 15% cumulative revenue growth next 2-3 years then c) sell for 75-90% of revenue and pocket $4.8 - 6.0 billion.

Take-away: Selling before fixing, precisely before an upturn, and for at least $2 billion less than necessary.

Stock call: No change to "Buy" rating and $28 target. Dumping Appliances was well telegraphed and in keeping with expectations.

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.