Like a washing machine that breaks down days after its guarantee runs out, Electrolux's big effort to expand in the U.S. has ended with a jolt and an expensive mess.
General Electric pulled the $3.3 billion sale of its home appliances unit to Electrolux on Monday after the Justice Department claimed the transaction would make the Swedish appliance-maker overly dominant in the U.S. cooker market. Electrolux tumbled as much as 17 per cent, the most in four years.
That disappointment is understandable. The deal would have been the largest in Electrolux's history. It would have boosted sales by about a third and delivered $350 million in annual cost savings from sourcing and operations.
Instead, the company has wasted 15 months pursuing GE's kitchen and laundry appliances unit and must now pay a $175 million break fee to the seller and absorb about 800 million kroner ($94 million) of costs linked to preparing and financing its own bid.
Scale is important in white goods, not least because it allows a manufacturer to spread research and development costs over a higher volume of sales. Those costs may go up as products are increasingly being networked through the internet of things (it costs more to develop cookers and washing machines you can control from your smartphone).
North America was particularly attractive for Electrolux, which already generated a third of its sales there in 2014, because of its growing population and increasing number of households.
At a time when emerging markets are under pressure and growth in Europe remains anemic, the GE business's exposure to North America, where it generates 90 percent of sales, seemed like a big advantage. Electrolux expects the U.S. market to grow by as much as 6 percent in 2015, compared with 2 percent in Europe.
Keith McLoughlin, Electrolux's Brooklyn-born CEO, put a brave face on the move on Monday, saying he was "disappointed," rather than defeated. Despite Monday's stock drop, he may have a point.
Electrolux's balance sheet is strong (net debt declined 28 per cent to 6.95 billion kroner in the third quarter) and its recent performance has been good. Operating profit rose 8 per cent in the third quarter and operating cash generation after investments was double that in the year-earlier period.
The question is what Electrolux it does with that cash. The CEO says the company has capacity to pursue other acquisitions.
He needs to prove he can do that. His rivals have had rather more luck in pursuing consolidation: Whirlpool bought a controlling stake in Italian appliance maker Indesit in 2013 for $1 billion.
While there are doubtless opportunities for Electrolux in emerging markets, Electrolux will probably struggle to land another fish as large and attractive as GE's home appliances business.
With 10.4 billion kroner in cash at the end of September, Electrolux could well afford to return some of that money to shareholders through dividends or buybacks.
For GE, the deal's collapse is a small setback in its plan to refocus on higher-margin industrial businesses such as aircraft engines and power generation. Appliances generated about $5.9 billion in revenue for GE last year, little over 5 percent of its total revenue from its non-financial businesses.
But if growth in the U.S. economy starts to stutter as interest rates rise, it will become harder for GE to find a private equity firm willing to pay as much as Electrolux was.
This column does not necessarily reflect the opinion of Bloomberg LP and its owners.
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