The world’s industry leader, GE (GE, Financial) is about to sell off its appliances section which is facing dearth in sales and having depressed margins. Way back in 2008, GE had first tried to sell off this unit which went in vain as financial crisis loomed large during that period. Now again, the management mulls over the sale of this section which is no longer a profitable association. Let’s get into the key aspects and find out the crux of the story.
Why Is The Unit Being Divested
The iconic appliances unit of GE has played a vital role in making the GE brand a household name. This unit is primarily into manufacturing of consumer products such as dishwashers, refrigerators and ovens.
Though GE spent more than $1 billion on its recovery during the recession phase in 2008, the unit’s margins have been insignificant since then. Though GE does not report the earnings from this division separately, this business constitutes the majority of the lighting and appliances unit. Last year this business unit had generated net income of $381 million on sales of $8.3 billion. On an overall basis, this unit comprised 8% of GE’s industrial segment revenue, but contributed nearly 2.3% to the company’s industrial segment profit.
While other contenders in the same segment have a worldwide footprint, GE’s appliance division sales are more concentrated in the U.S. which has been a chief reason for it's lagging sales. As emerging markets are taking a lead on the developed markets in terms of sales, GE’s profit book looks meager when compared to other global consumer appliance players such as Electrolux, Samsung and LG.
To understand how the contribution of this division has become insignificant to GE’s business model, let us take a sneak peek into the second quarter numbers released this July for the industrial segment's profitable sectors.
| Segment | Revenue (in millions) | Operating Profit | % |
| Power & Water | $6,292 | $1,133 | 18.01% |
| Oil & Gas | $4,761 | $665 | 13.97% |
| Aviation | $6,090 | $1,197 | 19.66% |
| Health Care | $4,483 | $730 | 16.28% |
| Total | $21,626 | $3,725 | 17.22% |
| Average | $5,407 | $931 | 16.98% |
Source: SEC Filings
We can notice that among the sectors in the industrial segment, healthcare forms the smallest unit with revenue of $4.5 billion garnered in the quarter. Each sector contributed robust profits which averaged to nearly 17% for the last quarter (without considering the Appliance section and the loss making industrial sectors of the quarter).
On the contrary, the “GE Appliances and Lighting” section gathered quarterly revenue of $2.1 billion, which fell short by almost 50% from the revenue generated by the healthcare segment of GE. The appliances section returned only $102 million last quarter, which is less than 5% operating profit – in no way comparable to the average of the other profitable sectors of the industrial segment.
What Could Be The Deal
Swedish appliance maker AB Electrolux (ELUXY, Financial) seems to be in preliminary talks with GE for acquiring the latter’s appliance unit. However, other bidders to the deal are LG Electronics, Samsung, Arcelik AS and startup company Quirky Inc.
For Electrolux, the acquisition of GE’s appliances business would be the enabler to expand in the U.S. and will allow Electrolux to diversify from its European base, which will likely show moderate growth in the upcoming years due to sluggish economic growth in Europe.
According to sources, the GE home appliances business which is under the GE emblem could be worth between $2 billion and $2.5 billion. However, neither GE nor any of the parties interested in the acquisition have provided any further comments.
How Could GE Be Benefitted
CEO, Jeffrey Immelt has expressed his interest in allocating resources to the high margin business domain. During the period when GE's management was brainstorming over the acquisition of industrial segment major Alstom in order to improve their margins substantially in the industrial sector, simultaneously the management was also toying with the idea of sell-off of their appliance section which was turning out to be more of a liability than an earner even after bailing it out in 2008.
Hence, the divestiture will stand to benefit GE surely in the long run as it wants to focus on the core industrial segment to generate higher margins in the coming quarters.
Wrapping Up
Whether the deal with Electrolux or any other company interested in GE’s appliance section will go through is something that would be worth watching – but only time can give the answer whether this unit will ultimately get a final taker. Let’s stay tuned and wait for the final deal to be struck, sooner the better from GE’s perspective.
