Several eyebrows were raised when Bloomberg reported last month that General Electric (NYSE:GE) plans to spin off its consumer appliances unit. GE's appliances have been a part of American homes for close to a century and are as popular as ever. As the industry was digesting the news, Bloomberg on Thursday released an update reporting that GE is in talks with Swedish electronic goods maker Electrolux and consumer product development company Quirky for a possible sale. In addition to the brand value, the appliances business also generates positive returns, so how wise is GE to part with it? Let's find out.
A quick look at the appliances and lighting segment
GE's appliance unit has created history several times by introducing to the world innovations such as the electric toaster, washing machine, and, more recently, self-cleaning ovens, refrigerator-door ice dispensers, portable air conditioners, and more. The company merged its appliance and lighting business in 2002, and the present GE appliances and lighting unit, or GEAL, is one of its seven industrial businesses. Its major offerings include coordinated kitchen suits, microwaves, ovens, washers, and water heaters. The division also makes lamps, lighting fixtures, and light-emitting diodes for residential and commercial uses.
In 2013, the business recorded sales of more than $8 billion and earned $381 million in profit. This was 8% of the total industrial segment's revenue and 2.35% of segment profit. In the last five years, the division has accounted for 8%-9% of total industrial segment revenues, but its contribution toward profits has steadily declined.
The American conglomerate attempted to sell this unit for $8 billion in 2008, but in the absence of a suitable buyer, and the subsequent economic downturn, it shelved the plan. Instead, GE spent $1 billion between 2010 and 2013 to revive this business. Presently, the company has 6,000 employees at its Appliance Park in Louisville, Ky.
Is it a good idea to sell the business?
In order to answer this question, we need to first understand what the company might gain or lose by taking this step. General Electric is a prominent player in the consumer electronics market, ranking third in the U.S., behind Whirlpool and Electrolux. GE has a host of appliances that can be operated seamlessly through a smartphone or a tablet device using its GE Brillion app. The company can take advantage of its position to expand further as the world moves toward smart-connect devices for homes.
The global smart home market is projected to reach $51.77 billion by 2020 at an estimated compound annual growth rate of 17.74% between 2013 and 2020. That's huge! Almost every major consumer electronics manufacturer is looking forward to this bright future. GE leaving the game at this juncture might look like loss of opportunity.
However, the decision to part with segments such as GEAL and GE Capital are part of a major corporate restructuring plan. CEO Jeff Immelt has committed to investors that he will expand GE's industrial segment and slowly move out of businesses that are loss-making or are considered noncore. For the current year, Immelt has set a target of selling such businesses worth $4 billion.
Two factors that could weigh on Immelt's decision regarding which businesses to focus on are profitability and ability to generate future service revenue akin to the big gas turbines and aircraft engines that GE sells. GEAL does not satisfy the second criteria and fares moderately on the first.
During the recently concluded second quarter, segment profit for GE's power and water segment was 18% of its revenue, while the aviation segment brought in 20% of revenue, and the transportation segment delivered 21% of its revenue. Against these handsome translations, the appliances segment could convert only 5% of its revenue into segment profit. For the period, the division's contribution to total industrial segment profit was a meager 1.7%.
The latest update
As per the just released Bloomberg update, the two "suitors" for GE's iconic appliances sale are Electrolux, which is attempting to increase its foothold in the U.S., its single-largest market, and Quirky, a start-up that allows individuals to submit their own product ideas online and builds goods based on those ideas. Last year, GE partnered with Quirky in developing several smart home devices. The report says the deal could be worth $2 billion, which is significantly lower than GE's 2008 asking price for the division. It's also quite low considering that GE invested $1 billion in the business in recent years.
Going ahead with the sale would be a big move for GE, but the unit is obviously not checking all the right boxes. That suggests there could be some merit in this strategy. But it's still unclear why GE is valuing the business so low. It will be interesting to see how Immelt carries out this spin-off. Keep watch for the next turn of events.
ICRA Online and Eshna Basu have no position in any stocks mentioned. The Motley Fool owns shares of General Electric Company. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.