GE Transportation-Wabtec merger
General Electric (GE) closed the year-long pending merger of its Transportation business unit with Wabtec today. Per the agreement, GE gets $2.9 billion in cash as well as Wabtec’s common stock and non-convertible preferred shares, which together represent a 24.9% economic interest in the combined company. Plus, existing GE shareholders have a 24.3% stake in the combined company.
GE and Wabtec entered a spin-merger transaction in May. GE agreed to spin off its Transportation division and merge with Wabtec. According to this agreement, GE and its shareholders would have a majority stake in the new company. However, the two companies revised the terms of the deal on January 25, making Wabtec the majority stakeholder.
Why GE offloaded its Transportation business
The spin-merger transaction of the Transportation division was part of GE’s ongoing restructuring initiative to optimize its business, enhance its liquidity position, and strengthen its balance sheet. The industrial conglomerate’s (XLI) Transportation business unit manufactures trains, marine diesel engines, and mining equipment.
However, the segment had been registering declining revenues and margins for the past few years due to intense competition from local players and train budget cuts in several global economies. The unit’s annual revenues plunged to $3.9 billion in 2018 from $5.9 billion in 2013. Similarly, the segment’s profit deteriorated to $633 million in 2018 from $1.2 billion in 2013.
So the spin-merger brought significant cash flow to the company, which it will use to lower its massive debt obligations. As of December 31, GE had a total outstanding debt of over $110 billion. Plus, the transaction should help it focus on the fast-growing aviation and renewable businesses.
Today, the company also made a breakthrough in enhancing its liquidity position. In a separate announcement, GE revealed that Danaher Corporation (DHR) has agreed to buy its BioPharma business. The transaction is expected to complete in the fourth quarter and bring in $21 billion in cash.
The announcements of the completed GE Transportation–Wabtec merger and sale of BioPharma assets to Danaher have boosted investors’ confidence in the stock. Shares of GE were trading 15% higher during early trading today.
CEO Larry Culp’s swift efforts to implement restructuring initiatives have helped GE gain investors’ confidence over the past two months, which reflects in its share price movement. Year-to-date, the stock has gained 34.3%—significantly outperforming peers Honeywell International (HON) and 3M Company (MMM), which have returned ~16% and 9.9%, respectively.