General Electric Company GE recently announced that it has scraped the deal to sell its electronics appliance unit to Swedish premier electronics manufacturer Electrolux AB ELUXY. Although the company has cited no official reason for the termination of the $3.3 billion transaction in limbo, it is apparently evident that the acrimonious lawsuit filed by the U.S. Department of Justice (DOJ) and its continuous scrutiny has likely led to the cancellation of the deal.
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 have resulted in higher prices for essential electronic goods that have been a part and parcel of everyday life.
As the news became public, share prices of both the companies moved south. While General Electric shares fell 0.4% to $30.37, Electrolux shares plunged 14.7% to $48.44.
GE Appliance: The Held-for-Sale Business
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.
Possible Fallout from the Stalemate
General Electric is divesting its various non-core operations in order to focus more on its industrial businesses. The restructuring initiatives of this Zacks Rank #3 (Hold) 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. By the end of third-quarter 2015, General Electric has signed agreements to dispose GE Capital assets worth $126 billion – well ahead of the target and remains firm to achieve its divestiture target of $100 billion for the year.
With the termination of the deal, General Electric is entitled to a break-up fee of $175 million from Electrolux. At the same time, the company revealed that it would seek other options to divest the electronics appliance business.
For Electrolux, the failure of the deal 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.
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