25 May

General Electric’s Transportation-Wabtec Deal: The Structure

WRITTEN BY Samuel Prince

The Transportation-Wabtec deal

The deal between General Electric (GE) and Wabtec (WAB) has been approved by their boards of directors. According to the agreement, General Electric will receive $2.9 billion in cash at the closing for a 9.9% stake in the new entity. GE and its stockholders will be entitled to a 50.1% ownership interest in the combined entity. Wabtec stockholders will receive a 49.9% ownership of the combined company. The deal is expected to close in early 2019.

General Electric’s Transportation-Wabtec Deal: The Structure

Deal structure: Reverse Morris Trust

General Electric and Wabtec have proposed a tax-efficient structure known as a Reverse Morris Trust. It allows the parties to avoid a huge tax burden, which is done by spinning off a segment or unit up for divestment and at the same time merging it with another entity. The GE-Wabtec transaction is valued at $11.1 billion. When adjusted for the net tax benefit of $1.1 billion accruing to the merged entity, the transaction value amounts to $10 billion. Here are some other aspects of the deal:

  • GE shareholders will receive 2% at closing, and GE will get 9.9%.
  • The GE Transportation segment will be distributed to GE stockholders through a tax-free spin-off or split-off that will immediately merge with Wabtec.
  • GE’s stake is subject to a customary lock-up period of 90 days and some other provisions.

The new entity’s structure

Albert Neupaver, chairman of Wabtec, will be the executive chairman of the combined entity. Raymond Betler, the current CEO of Wabtec, will retain his role in the merged company. Stéphane Rambaud-Measson, who joined Wabtec with its Faiveley acquisition, will become president and CEO of Wabtec’s Transit vertical. GE Transportation president Rafael Santana will assume the role of president and CEO of Wabtec’s Freight segment.

A look at XLI

A total of 99 ETFs have General Electric in their portfolios. The Industrial Select Sector SPDR ETF (XLI) has the highest exposure (5.6%) to the stock. It also has a 17.9% exposure to aerospace and defense (BA), an 11% exposure to major US airlines (DAL), and a 9.5% exposure to prominent US railroads (UNP).

In the next part of this series, we’ll dig deeply into the business and financials of GE Transportation and Wabtec.

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