When Electrolux (OTC:ELUXY) agreed to buy the appliance business of General Electric (NYSE:GE) last year for $3.3 billion, analysts suggested it beat out competing manufacturers because it was paying a rich premium that valued the division at 7.3 times earnings before interest, taxes, depreciation, and amortization.
But the deal was scuttled by GE after the Justice Department objected due to antitrust concerns. Regulators feared that the Swedish company would have a 40% share of the overall appliance market, and that between the newly combined company and Whirlpool (NYSE: WHR), they would have as much as 90% of the cooking appliance market essentially creating a duopoly and thus higher prices for competitors.
Now, Chinese appliance manufacturer Haier (OTC:HRELF) is jumping at the chance to pick up where Electrolux left off while significantly increasing its presence in the U.S. The appliance maker has offered to buy the GE division, but it will pay 10 times the business's EBITDA, or $5.4 billion, for the privilege.
According to The Wall Street Journal, the market values Whirlpool's stock at 7.6 times EBITDA, Haier's Shanghai appliance business at 7.5 times, and Electrolux at 6.6 times. Haier says the premium being quoted for its purchase doesn't include the synergies that will accrue to the deal, and once they're factored in, the valuation drops to 8.2 times EBITDA. Considering GE has been trying to exit the appliance business for years, and Haier's negligible presence in the U.S. market will make for a much easier regulatory review process, it seems the Chinese appliance maker is still hugely overpaying for the assets.
Yet Haier may not have much choice. The Chinese economy is in the throes of a dramatic slowdown. Between 1980 and 2010, China's economy expanded at an average rate of 10% annually. But then it began to slow, and between 2012 and 2014, it grew at an average rate of just 7% annually, and fell to 6.8% in the fourth quarter of 2015, bringing the full year's expansion to 6.9%, it's weakest performance in 25 years. It's fully expected to slow even further.
That decay is weighing on the Chinese appliance market, which grew at a 17% annual rate during the boom years, but was barely above break-even at 1.5% in 2015.
In contrast, the U.S. appliance market is looking vibrant, expanding at a 6.1% annual clip for the last three years. Because the deal will lift Haier into the top tier of appliance manufacturers -- and it will continue to use the GE name for as long as 40 years after the acquisition closes -- paying top dollar and then some for a transaction that should ease through antitrust reviews is almost a no-brainer for the manufacturer. It also gives it the chance to overtake Sears Holdings (NASDAQ:SHLDQ) Kenmore, a brand whose market share has slumped to less than 14% -- down from over 40% in the early part of the last decade.
Still, it's not completely a done deal. Although the Justice Dept. might not be worried about market domination from Haier, the Chinese company will likely come under scrutiny from the Committee on Foreign Investment in the United States, which reviews investments by foreign companies in U.S. companies, or their operations from the perspective of their national security implications.
In its latest annual report, which covers 2013, the Committee investigated half of all the cases that were brought before it and said that between 2009 and 2013, it investigated roughly 40% of the 480 cases filed -- 193 of them. Of that total, 38 cases had their notices withdrawn by the companies.
Haier has attempted to get into the U.S. market before, trying first to buy Maytag in 2005 (but beat out by Whirlpool) and then negotiating to buy GE's business in 2008, but pulling out because the price tag was too high. Obviously, that's a mistake Haier is willing to make twice.