Tuesday, September 9, 2014

GE Finally Strikes the Chord With Electrolux

General Electric (GE) has ultimately decided to sell its Appliances unit to one of the bidders – the Swedish consumer durables company, Electrolux (ELUXY) for a cash deal of around $3.3 billion. GE is exiting the kitchen floor to focus completely on its core industrial business segments. And Electrolux is hoping to add popularity to its brand name through this latest acquisition. This deal will combine Electrolux's Frigidaire; one of the best known brands for refrigerators with GE's stable of products including the monogram line of luxury appliances. So, let's dive into the details of the Electrolux-GE deal for further understanding.

Inside the deal

General Electric, which commercialized the electric toaster and the self-cleaning oven, is spinning off the Appliances unit to Electrolux with the motive of reframing the company as a core industrial company. The shift is the work of Chief Executive Jeff Immelt, who wants to turn GE into a high-tech infrastructure company. The management of GE is interested in reaping nearly 75% of their earnings from the industrial businesses by 2016, while becoming less reliant on the Appliances section.

As GE's CEO wants to sever all ties with middle-class American consumers, the sell-off to Electrolux is expected to get completed by end of 2015. However, Electrolux has signed an agreement with GE for continuing usage of GE appliances brand name for a term of around 40 years, for which it would be paying an annual royalty fee.

This deal is, however, still subject to regulatory approval and carries a $175 million termination fee if Electrolux fails to win regulatory approval.

The Electrolux-GE agreement also includes selling off the 48.4% stake of GE Appliances in Mexican appliance maker Mabe, which has aided to develop and manufacture GE appliances through a joint venture for almost 30 years.

Electrolux emerges the final winner

Soon after the acquisition news hit the market yesterday, Electrolux shares rose by 5.1%. Analysts have opined that this latest move by Electrolux will give it more exposure to the premium appliance segment in the U.S. and will help to pull up its revenue after the amalgamation is completed since the U.S. economy is in a revival phase in terms of consumer spending power.

Last year, Electrolux, already one of the world's largest manufacturers of home appliances and industrial appliances, posted revenue of about $15 billion, while GE Appliances generated revenue of around $5.7 billion during the same period. Sales of major appliances in North America accounted for nearly 29% of Electrolux's revenue for the year.

Now, if GE Appliances and Electrolux sales were combined for the previous year, sales in North America would have accounted for about 47% of the latter's revenue. And the best part for Electrolux is that this acquisition could place it at par with the market honcho, Whirlpool Corporation (WHR), which posted revenue of $18 billion last year.

Thus this acquisition of GE Appliances represents a major opportunity for Electrolux to expand its business in North America, one of the largest markets for home appliances. Electrolux CEO, Keith R McLoughlin said, "We think its transformational for us." He stated that by nearly doubling the North American business through this venture, it would offer stronger purchasing power in negotiations with suppliers.

The company even expects to achieve a yearly cost savings close to $300 million, if the transaction finally gets a green signal during the regulatory approval phases.

To conclude

The deal marks the end of the era for GE as a household name as the company looks eager to eliminate its ties with its iconic business division- one that gave birth to the washing machine and the dryer and the toaster oven. And it is the largest ever transaction for Electrolux, which began as a maker of vacuum cleaners in 1910 and then expanded into home appliances in 1920. So, let's stay tuned to find out how this major transformation affects Electrolux in the long-run and how GE adapts to the change in business approach down the years. But as of now, the deal is yet to pass through a series of approvals and there might be something new to catch upon within the stipulated timeframe set for the acquisition. Let's keep watching!

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