By William Patalon III
Money Morning/The Money Map Report
While industry insiders say that General Electric Co. (GE) may be looking to sell or spin-off its home-appliance business unit, the move may actually be the first in a series of divestitures designed to unshackle the Corporate America heavyweight from consumer-driven markets.
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The rumored decision to shed the century-old business that makes refrigerators, ovens and dishwashers may signal even bigger divestiture deals before the year ends, as GE Chief Executive Officer continues pursuing his strategy of shifting the huge conglomerate out of economically sensitive sectors. Since Immelt announced that plan in December 2002, GE has cut loose more than $75 billion worth of its business units, including insurance and plastics, The Financial Times reported.
At the same time, the Immelt initiative has led GE to make more than $50 billion in acquisitions in faster-growing areas, such as aviation products and services, and wind power. [In fact, former corporate raider T. Boone Pickens Jr., has unveiled plans for the world's largest wind farm, an ultimate $10 billion project that will utilize GE turbines. To read that story, also featured in today's issue of Money Morning, please click here].
GE officials have declined to comment on the media reports speculating about the potential divestiture.
With the U.S. economy slumping, and the scorched American housing market not expected to rebound for years, GE has put a premium on the divestiture of consumer-focused businesses. That effort gained an additional urgency recently when GE stunned investors by revealing that its profit actually declined in the last quarter.
That decline came even though Immelt has a stated goal of having GE's profits grow at an average annual rate of 10%, something it did under his legendary predecessor: the now-retired Chairman and CEO John "Jack" Welch.
The company's shares closed at $32.37 yesterday, down 14 cents. They are down 13% so far this year.
GE's appliance unit accounted for more than half of last year's $13.3 billion in revenue generated by the company's Consumer & Industrial business unit, which also sells switches and lighting hardware. In fact, GE's decision to sell, spin off or find a partner for the appliance unit may be merely the first step toward divesting the entire consumer/industrial segment of its business, according to an analyst at Credit Suisse Group AG (ADR: CS).
"GE could be exploring multiple strategic alternatives, including the sale or spin-off of all of Consumer & Industrial, as well as the potential sale of individual pieces," Credit Suisse analystwrote in a note to clients yesterday (Thursday).
Selling or otherwise divesting the entire Consumer & Industrial segment could cut GE's earnings per share by as much as 10 cents, since it provided just over $1 billion in operating profits last year, Credit Suisse's Parent wrote.
Overall, GE's profit from continuing operations was $22.47 billion on sales of nearly $173 billion in 2007. The Commercial & Industrial group is one of six mainstay divisions. It generates substantial amounts of free cash, which could be used for additional purchases, and also has a strong brand name, which has an intrinsic value. But the overall division also houses most of GE's slowest-growing properties, making it an excellent deal candidate, analysts say.
The GE appliance unit pioneered the electric toaster back in the early 1900s, had sales of $7.2 billion last year, and is the largest supplier of appliances to newly built homes in the United States, The FT reported. Rival Whirlpool Corp. (WHR) is the world's largest overall appliance maker. Whirlpool CEO told analysts last month that demand for home appliances has dropped for seven consecutive quarters.
A sale of the GE appliance unit alone could bring $3 billion to $8 billion, according to published reports, although GE's take is likely to be at the higher end of that range – most likely in the $6 billion to $8 billion range. The company has reportedly had talks with several investment banks, including Goldman Sachs Group Inc. (GS).
Analysts and industry insiders say that possible suitors could include companies from China, South Korea or India that are in the market for strong brand names, and that want to take over established distribution chains in the United States and other developed markets. And since the unit has strong cash flow, buyout firms and private-equity players also could be in the mix if the appliance unit goes up on the auction block.
News and Related Story Links:
GE Appliance Sale May Foreshadow More Divestitures.
The Financial Times:
GE could sell appliances unit.
T. Boone Pickens Jr.
The Financial Times:
GE steps up plans to trim amid slowdown.
About the Author
Before he moved into the investment-research business in 2005, William (Bill) Patalon III spent 22 years as an award-winning financial reporter, columnist, and editor. Today he is the Executive Editor and Senior Research Analyst for Money Morning. With his latest project, Private Briefing, Bill takes you "behind the scenes" of his established investment news website for a closer look at the action. Members get all the expert analysis and exclusive scoops he can't publish... and some of the most valuable picks that turn up in Bill's closed-door sessions with editors and experts.