According to press reports, General Electric Company (GE -0.69%) is considering selling off its home appliances and lighting division, with figures of $1.5 billion to $2.5 billion being tossed around. While the deal makes perfect strategic sense for General Electric, the price looks too low when compared with home-appliance peers such as Whirlpool Corp. (WHR -1.61%). Moreover, the division has significant growth opportunities from the replacement cycle in the home appliance industry, and in LED lighting -- just look at Cree, Inc. (WOLF -0.79%) and its LED lighting prospects. So, what sort of price would make sense?
General Electric continues restructuring
From the company's perspective, selling the division would further CEO Jeffrey Immelt's aim of refocusing the company back onto its industrial side. Most people don't consider it a core holding, even though the home appliances and lighting division represents the most visible part of the business to the American consumer.
As for other elements of the company's plans, investors can read here about how it's been investing in its oil and gas division and here about its aviation division. Meanwhile, the IPO of Synchrony Financial, its consumer lending unit, is further evidence of its shift in emphasis toward the industrial sector. Meanwhile, the bid for Alstom's energy business is seen as a sign of acquisition activity in the sector and an attempt to generate cost synergies by consolidating power-generation operations.
In the context of all this activity, the sale of the home-appliances business makes perfect sense. Despite being an iconic business, the division ranks third in the U.S. behind Whirlpool and Electrolux. Moreover, it's the smallest contributor to segmental profitability, and selling it would free up management's time and resources to focus on its industrial operations.
Source: General Electric Company
Why the home appliances and lighting business is attractive
While the rationale for selling the business adds up, that doesn't mean General Electric shareholders should expect management to sell it cheaply. In fact, there are three reasons the business is attractive on a standalone basis.
First, white-goods manufacturers such as Whirlpool look set to benefit from the 10-year anniversary of the U.S. housing boom. Note in the following chart how home laundry product shipments peaked in 2005-2006 -- if home goods tend to depreciate over 10 years, then companies such as Whirlpool can expect to see a replacement cycle to kick in.
Source: Association of Home Appliance Manufacturers.
Quoting from Whirlpool Corp.'s most recent conference call on the subject of North American demand:
[W]e remain confident in our industry demand assumption of 5% to 7% demand growth for the year, as we expect growth in U.S. housing for the full year, increased demand related to the replacement cycle of appliances, and significant improvement in discretionary demand that we're currently seeing improving.
Second, Cree and General Electric both have a huge growth opportunity from the secular growth story of LED lighting. Indeed, in its most recent results, Cree grew its lighting products revenue by 35% and gross profits by 21% year on year. In fact, LED lighting products have taken over as the growth engine driver for Cree. Similarly, General Electric saw its LED lighting revenue increase by 50%, even as its total lighting revenue declined by 1%. Nevertheless, a potential buyer would get a high-growth LED lighting business to invest in.
Third, the home appliances and lighting division has cyclical growth prospects from the recovery in the U.S. housing market. For example, Fools already know that the home-goods stores continue to make positive noises about the housing market.
What about the price versus Whirlpool?
On the basis of the $1.5 billion to $2.5 billion figure I mentioned, the business looks cheap. For example, here's a look at Whirlpool's enterprise value (market cap plus debt)-to-earnings ratio before interest, tax, depreciation, and amortization or EBITDA.
WHR EV to EBITDA (TTM) data by YCharts
Going back to General Electric's 2013 results, the home appliances and lighting business generated $381 million in segmental operating profit. Taking this figure as a proxy for EBITDA and assuming a valuation similar to Whirlpool's would give a figure of more than $2.9 billion for the division.
All told, shareholders should hope for a figure closer to $3 billion for any potential deal. In addition, given that a potential buyer could buy an immediate share of the North American home-appliance market and be able to benefit from the underlying growth prospects in the industry. It's reasonable for shareholders to be looking for that $3 billion mark.
