When General Electric's (NYSE:GE) $3.3 billion deal to sell its iconic appliances division to Swedish-based Electrolux (OTC:ELUXY) 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.