General Electric’s (GE) Transportation segment manufactures trains, marine diesel engines, and mining equipment. The division is the company’s second-smallest unit by sales. For the past few years, the Transportation business has been witnessing declining revenues and margins due to train budgetary cuts in several global economies and intense competition from regional and local players.
A brief look at General Electrics’ historical financial results shows that the Transportation division’s revenues and operating profits have been falling for the last several years. In 2013, the segment’s revenues and operating profit were $5.9 billion and $1.2 billion, respectively. The revenues and operating profit were $4.1 billion and $824 million in 2017.
Spin-merger agreement with Wabtec
To get rid of underperforming assets and maximize shareholder wealth, General Electric’s previous CEO, John Flannery, evaluated sales and spin-off options. In mid-May, Flannery found a deal that suited both of his purposes.
On May 21, General Electric announced that it entered into a spin-merger deal with Wabtec. General Electric would spin off its transportation business and merge it with Wabtec. The deal is worth $11.1 billion. The deal is expected to close in early 2019.
According to the agreement, General Electric will receive $2.9 billion in cash and a 9.9% stake in the new entity. The company’s existing shareholders will be entitled to a 40.2% stake in the combined company.
The Vanguard Industrials ETF (VIS) has allocated 3.6% of its funds in General Electric stock. VIS also has a 12.6% exposure to industrial conglomerates including Honeywell International (HON), 3M (MMM), and United Technologies (UTX). Honeywell, 3M, and United Technologies have weights of 3.9%, 4.1%, and 3.4%, respectively, in VIS.