Industrials

Nisha Gopalan is a Bloomberg Gadfly columnist covering deals and banking. She previously worked for the Wall Street Journal and Dow Jones as an editor and a reporter.

Chris Bryant is a Bloomberg Gadfly columnist covering industrial companies. He previously worked for the Financial Times.

Rarely has disappointment tasted as sweet. When GE's deal to sell its appliances unit to Electrolux fell apart in December because of antitrust concerns, it seemed the U.S. industrial conglomerate had missed another opportunity to get out of a business it also failed to offload in 2008.

Recent Rally
Bloomberg

But from those ashes, GE has plucked a phoenix. First, the U.S. company received a $175 million break fee from Electrolux. And now it's struck a $5.4 billion deal to sell the white goods division to Haier Group, China's number-two appliance manufacturer by market share.

By seeking offers from multiple bidders (Bloomberg News reported that Haier's Chinese rival Midea was among the suitors), GE secured a 64 per cent premium to the $3.3 billion price Electrolux agreed to pay in 2014.

Although GE's appliance sales rose 10 per cent in the third quarter and the unit's estimated 2015 Ebitda has advanced 50 per cent compared with two years ago, the price still looks steep for a comparatively low-margin, low-growth business. GE's combined appliances and lighting unit had a 5.1 per cent "segment profit margin" in 2014.

GE's Appliances & Lighting Division Hasn't Grown Much
The combined unit had a 5.1 percent operating margin in 2014.
Source: Annual reports

GE said the sale valued its white goods unit at 10 times Ebitda. Naturally, Haier was more conservative, saying "net of certain expected benefits" (thought to be tax savings) it's paying 8.2 times.

Electrolux's previous offer valued the business at 8 times trailing Ebitda, GE said at the time. By way of comparison, sector rival Whirlpool trades at about 7 times estimated 2015 Ebitda, according to analysts at Morgan Stanley, while Electrolux is at 9 times.

All in, GE expects a 20 cents per share gain on the sale (around $1.9 billion), far in excess of the 5-7 cents per share it expected from Electrolux. A good result.

Haier can take some comfort in knowing that when it was first interested in the GE appliance business back in 2008, a sale price of up to 8 billion dollars was touted. The U.S. real estate crash put paid to that.

Yet given the still elevated price tag, it will have to find a way to extract more value from the purchase than Electrolux was able to identify.

That needn't be a forlorn task. GE's appliance unit -- with $5.9 billion of revenue last year -- is focused almost entirely on the North American market and Haier has only a 1.1 percent share of the U.S. consumer appliances market, according to Euromonitor data.

So Haier will want to use the more than 100-year-old GE brand to expand that share. At the same time, it will try to sell GE's more technically-advanced products -- with promised connection to the "Internet of Things" -- to an appliance-hungry Chinese middle class.

If Haier is successful in marrying its own strong China domestic market position with GE's trusted brand, a formidable global competitor could emerge. So while GE will be thrilled about the price it extracted for an unwanted asset, those companies whose future remains in white goods -- Whirlpool, Electrolux, Bosch-Siemens, LG and Samsung, to name a few -- will be a little less delighted.

Update: An earlier version of this story said GE stood to receive a break-up fee from Electrolux. It has already received the fee.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the authors of this story:
Nisha Gopalan in Hong Kong at ngopalan3@bloomberg.net
Chris Bryant in Frankfurt at cbryant32@bloomberg.net

To contact the editor responsible for this story:
James Boxell at jboxell@bloomberg.net