The U.S. Department of Justice (DOJ) recently filed an acrimonious lawsuit against the proposed sale of the appliance unit of General Electric Company GE to Swedish premier electronics manufacturer Electrolux AB ELUXY. The $3.3 billion transaction in limbo is likely to dent General Electric’s strategic aim to focus on core industrial businesses as well as thwart Electrolux’s efforts to gain additional mileage in the region.
The lawsuit intended to prevent an alleged duopoly in the U.S. appliance market for stoves and ovens as General Electric, Electrolux and market leader Whirlpool Corp. WHR commanded about 90% of the market share. Consequently, the arbitrators felt that the transaction would result in higher prices for essential electronic goods that have been part and parcel of everyday life.
However, both the company spokespersons refuted the allegations and stressed that the deal would be in the best interest of the consumers and would provide better and supplementary alternatives, encouraging healthy competition among various market players.
GE Appliance: The Divested Entity
The GE Appliance segment sells and services major home appliances including refrigerators, freezers, electric and gas ranges, cook tops, dishwashers, clothes washers and dryers, microwave ovens, room air conditioners, and residential water systems under the GE Monogram, GE Cafe and Hotpoint brands. The segment also includes a much smaller lighting business that is not being considered for sale.
The business is exclusively focused on the U.S. markets and thereby lacks the global scale to compete with other leading electronics manufacturers like Samsung Electronics Co. Ltd. SSNLF and LG Electronics Inc., leading to flatter revenues and shrinking margins. Consequently, the divestiture is likely to unlock additional value by allocating more resources to higher-growth businesses.
Electrolux: The Acquiree
With brands such as Frigidaire, AEG, Zanussi as well as the namesake brand, Electrolux is currently serving as the challenger to market leader Whirlpool in the U.S. for sale of appliances such as dishwashers, cook-tops and refrigerators.
Of late, Electrolux has been countering dwindling demand in Europe and Brazil due to challenging macroeconomic conditions, resulting in soft organic growth in the region. In order to offset this, the company is focusing on improving its revenues from the U.S., which serves as its largest single-country market. The acquisition of GE Appliance business will enable Electrolux to strengthen its position in the market. With the iconic GE Appliance in its kitty, Electrolux’s annual sales in North America are expected to double to $10 billion. In addition, the acquisition is likely to yield $350 million in annual cost savings from a combined resource pool.
Possible Fallout from the Stalemate
If the transaction fails to materialize, it would be a huge setback for General Electric, which is divesting its various non-core operations in order to focus more on its industrial businesses. The restructuring initiatives of this Zacks Rank #4 (Sell) stock will likely result in a simpler and nimbler firm with a re-focus on its core industrial roots with emphasis on big-ticket items such as medical equipment, turbines and scanners. General Electric reiterated its goal to close deals worth $100 billion in assets this year. To date, the company has disclosed a potential buyer list for $68 billion worth of assets.
Jeff Immelt, the CEO of General Electric, asserted that the low interest rates currently prevalent in the economy, coupled with abundant liquidity in the corporate market present an opportune time for the asset sell-off while these conditions still persist. If the Electrolux deal gets logjammed due to legal imbroglio, it could cast a dark cloud of uncertainty for the revival of this industrial goods manufacturer.
For Electrolux, the stalemate would hinder its plans to challenge the market leader in the U.S. and gain significant market share in the region. The stalemate is also likely to rob its competitive advantage after it successfully obtained regulatory approvals in other countries like Brazil, Canada and Ecuador.
Meanwhile, investors are likely to keep a close watch on the situation to gauge the flow of tide and would prefer to have a clearer picture at the earliest for the overall benefit of all the stakeholders involved in order to ease the indecisiveness and ambiguity plaguing the entire episode.
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