General Electric’s (GE) transportation unit and Wabtec got another step closer toward their proposed $11.1 billion merger with approval from the US Department of Justice (or DOJ). In a press release yesterday, GE revealed that the DOJ had closed the review of the pending merger. Thus, the company anticipates the deal to finish by the end of the first quarter of 2019, subject to some customary closing conditions.
The two companies entered into a spin-merger deal on May 21 last year wherein GE agreed to spin off its transportation unit and merge with Wabtec. According to the agreement, GE will receive $2.9 billion in cash and a 9.9% stake in the new entity. The industrial conglomerate’s existing shareholders will be entitled to a 40.2% stake in the combined company.
The combined company is anticipated to have an expanded global reach, an attractive business mix, and improved margins. Also, the merger will make Wabtec a Fortune 500 company with worldwide operations across over 50 countries.
Why GE opted for this spin-merger
The underperformance of several businesses including its Power, Transportation, and Lighting businesses has been weighing on GE’s overall revenues and profitability growth. Moreover, the company has been facing a severe liquidity crisis due to a high debt level and negative cash flows.
Therefore, to optimize its business, strengthen the balance sheet, and shore up its cash position, GE announced a massive restructuring plan last year that includes spin-offs and divestments of several underperforming assets. The spin-merger deal for the Transportation business unit is a part of the same restructuring plan.
GE’s Transportation division manufactures marine diesel engines, trains, and mining equipment. The segment is the company’s second-smallest unit by sales. For the past few years, the Transportation business unit has been witnessing declining revenues and margins due to intense competition from regional and local players and train budgetary cuts in several global economies.
A brief look at GE’s historical financial results shows that the Transportation segment’s revenues and operating income have been declining for the last few years. In 2013, the division’s revenues and operating profit were $5.9 billion and $1.2 billion, respectively. In 2017, revenues and operating income came down to $4.1 billion and $824 million, respectively.
The Industrial Select Sector SPDR Fund (XLI) has allocated 3.4% of its funds in GE stock. XLI also has 15.5% exposure to industrial conglomerates including Honeywell International (HON), 3M (MMM), and United Technologies (UTX). Honeywell, 3M, and United Technologies have weights of 5%, 5.5%, and 4.4%, respectively, in XLI.