Swedish equipment maker Electrolux (NASDAQOTH:ELUXY) lost $1.2 billion worth of market capitalization on Monday -- and the damage won't end there.
Early Monday morning, General Electric (NYSE:GE) announced that it "has terminated its agreement to sell its Appliances business to Electrolux." The deal, which would have turned Electrolux into America's No. 2 manufacturer of major home appliances, will now be called off. And Electrolux will be stuck with the $47 million bill for work it's already invested in getting the deal done, plus an anticipated $175 million "breakup fee" that GE negotiated against the event of the deal falling through.
Which it now has.
What went wrong
GE blames opposition from federal antitrust regulators for its decision to pull out of the $3.3 billion deal. Apparently, Department of Justice regulators worried that adding GE's 16% market share in home appliances to the 8% of that market that Electrolux already controls would hurt consumer choice. The merged company would control nearly a quarter of the appliances market in the U.S.
Meanwhile, No. 1 Whirlpool (NYSE:WHR) already controls a 30% share. A successful merger between GE and Electrolux would have meant that the top two players in home appliances would dominate more than half the market. Korea's LG -- a distant third at just 14% -- plus No. 4 Samsung at 10%, combined would only barely be as big as No. 2 Electrolux if the merger were permitted to happen.
So it won't.
What's it mean for Electrolux?
This all leaves Electrolux in something of a bind. Being the No. 5 player in a U.S. market where the Americans remain dominant and the Koreans are rising fast threatens to make Electrolux increasingly irrelevant. Plus, Electrolux must now bear the costs of the breakup fee on top of its preparatory legal and accounting costs already incurred.
Worse, there's the possibility that Electrolux's competitive position will worsen even further, because according to GE, it's going to continue to try to sell GE Appliances to someone else.
What's it mean for GE?
Who will that "someone else" be? To whom will GE turn to get the $3.3 billion it was hoping to get from Electrolux, in exchange for GE Appliances?
Obviously, not LG or Samsung. Their better-than-Electrolux market shares will make both those options anathema to the DOJ as even more anticompetitive than a sale of GE Appliances to Electrolux. Similarly, there's no chance GE will be allowed to sell its appliances division to market leader Whirlpool. That means that, if GE still intends to sell the appliances division, it will have to dig deep into the 20% of the U.S. appliances market that, according to website statista.com, belongs to "other," smaller players.
It's one of those rivals that will now likely leapfrog Electrolux to become the No. 2 player in the U.S. home appliances market. That is, assuming GE continues trying to sell its marquee consumer business.
Rich Smith does not own shares of, nor is he short, any company named above. You can find him on Motley Fool CAPS, publicly pontificating under the handle TMFDitty, where he's currently ranked No. 321 out of more than 75,000 rated members.
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