Drat! Foiled again! I imagine that was the reaction over at General Electric (NYSE: GE) this week, after news broke that Britain's BAE Systems is canceling its projected $2 billion divestiture of its North American Platform Solutions division.
As recently as last week, the bidding to buy the unit was heating up, with GE and Eaton (NYSE: ETN) reportedly in the running. I'm not sure what happened to Goodrich (NYSE: GR) and Honeywell (NYSE: HON); those two had also reportedly expressed interest. Honestly, as a maker of aircraft engine controls and other aerospace parts, the PS division would have fit neatly into any of these corporate conglomerates. But it would have fit best at GE.
As we've been discussing lately, GE is in the midst of a major move to downsize its troubled finance division in favor of its core manufacturing business. It's made billion-dollar inroads into the energy sector as it competes with the big boys of the industry, Schlumberger (NYSE: SLB) and Baker Hughes (NYSE: BHI). It's reinvesting in its appliances division, and recently announced the biggest-ever mass purchase of electric cars (to which Chevy Volt maker General Motors (NYSE: GM) says "thanks!") as GE seeks to incubate America's nascent electric car industry ... and build the infrastructure to charge it.
Since GE is already a customer of BAE, and since it's paying BAE to build the electronic controls for GE's airplane engines, buying PS would make for a good case of vertical integration.
There was just one problem: the price.
My kingdom for a pencil sharpener!
When we first learned of this spinoff back in September, rumor had it that BAE would seek the princely sum of 10 times EBITDA for its unit. (BAE itself cost only four times EBITDA at the time.) By last week, though, BAE was overheard pleading with potential purchasers to "sharpen their pencils" and make a better offer.
It appears the deal has fallen through, then, for want of a pencil sharpener. This week, we learned that the PS bidders wanted to pay less than nine times EBITDA. BAE insists that it simply changed its mind: "We've always said it was a strong business and we did say there was no guarantee we'd sell it." But to this Fool, it seems more likely that price was the sticking point. BAE wanted GE and friends to overpay for its supposed crown jewel. The buyers balked.
If that's truly why the sale fell through, I'd like to congratulate GE. No amount of "synergies" can offset a too-high price. Valuation always matters, and I'm glad that GE seems to have remembered that.
