Please ensure Javascript is enabled for purposes of website accessibility

General Electric Company Turns Lemons Into Lemonade

By Steve Heller - Jan 15, 2016 at 5:15PM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

This morning, GE announced the sale of its appliances unit to Chinese appliance manufacturer Haier for $5.4 billion -- nearly 64% more than what Electrolux had agreed to.

Image source: GE.

When General Electric's (GE 3.82%) $3.3 billion deal to sell its iconic appliances division to Swedish-based Electrolux (ELUXY 1.24%) soured, the industrial giant turned lemons into lemonade. This morning, GE announced the sale of the unit to Chinese appliance manufacturer Haier for $5.4 billion -- nearly 64% more than what Electrolux had agreed to. The cherry on top is the $175 million breakup fee that GE received from Electrolux when that deal was terminated.

Overall, the Haier deal is a much better deal for shareholders.

A lush premium
Haier agreed to purchase GE Appliances for 10 times trailing-12-month earnings before interest, taxes, depreciation, and amortization, or EBITDA. When the Electrolux deal was announced in 2014, the agreed price was 7.3 times EBITDA.

According to The Wall Street Journal, the Haier deal represents a significant premium in the marketplace. Currently, Whirlpool's stock trades at 7.6 times EBITDA, Electrolux at 6.6 times, and Haier's appliances subsidiary trades at 7.5 times. After accounting for synergies, Haier's management believes it paid about 8.2 times EBIDTA for GE Appliances.

Prior to this deal, Haier commanded about 10% of the global appliances market, but less than 1% of the lucrative U.S. market, which has been growing by 6.1% annually over the last three years. This low U.S. market share was arguably a key selling point for GE, because the sale isn't as likely to be met with the same resistance from the U.S Justice Department that the Electrolux deal faced. In the Electrolux deal, the Justice Department argued that a combined GE-Electrolux entity and Whirlpool would together control 88% of cooking ranges in the U.S, which is troubling for consumers.

A win for both sides
Buying GE Appliances gives Haier greater access to the U.S. market and allows it to expand the brand's presence within mainland China. GE expects the deal will generate an after-tax gain of $0.20 per share, which will be offset from the ongoing restructuring that the company is doing to exit the financial services business.

Ultimately, this sale reflects positively on GE's management, in its ability to quickly react to a disappointing development and make a deal that's even more valuable for shareholders. It also shows that GE continues to make progress in its transformation into a streamlined, more focused industrial company.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

General Electric Company Stock Quote
General Electric Company
GE
$77.38 (3.82%) $2.85
AB Electrolux (publ) Stock Quote
AB Electrolux (publ)
ELUXY
$29.34 (1.24%) $0.36

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning service.

Stock Advisor Returns
332%
 
S&P 500 Returns
118%

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 05/26/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.