GE revamp picks up pace with an $11.1B rail merger
General Electric Chief Executive Officer John Flannery is taking the biggest step yet in his plan to revitalize the beleaguered manufacturer, agreeing to merge its century-old locomotive business with Wabtec Corp. in a deal valued at $11.1 billion.
GE and its shareholders will own 50.1 percent of the combined operations, distancing the company from the cyclical rail market while still leaving it with an ongoing stake in the recovery of North American freight demand. Under the terms of the tax-free transaction, GE will receive an upfront cash payment of $2.9 billion, the companies said Monday in a statement.
The deal furthers Flannery’s efforts to streamline operations and reduce the complexity he blames for deepening the company’s problems. Faced with one of the worst slumps in GE’s 126-year history, the CEO has pledged to cut costs and refocus the Boston-based manufacturer on key markets, such as aviation and energy.
The combination will transform rail-equipment maker Wabtec, which will roughly double its annual revenue by adding one of the world’s largest manufacturers of freight locomotives. The Wilmerding, Pennsylvania-based company said it was attracted to the complementary products and a growing order book after several lean years for the industry.
GE advanced 2.4 percent to $15.33 at 9:31 a.m. in New York. The stock declined 14 percent this year through May 18, while the S&P 500 Index increased 1.5 percent. Wabtec rose less than 1 percent to $95.50 in Monday trading.
The deal will “improve our ability to address the cyclicality” associated with the freight industry, Wabtec CEO Raymond Betler said on a conference call. He will remain in the same role after the deal closes.
GE Transportation, which had about 8,000 employees at the beginning of the year, has faced falling sales after a decline in North American rail-shipping volume left an oversupply of trains. GE said in July it would cut hundreds of jobs while ending most locomotive manufacturing in Erie, Pennsylvania, and shifting some work to a non-union factory in Fort Worth, Texas.
Despite industry challenges, GE Transportation routinely ranks among GE’s most-profitable units. It generated operating income of $824 million last year, with a profit margin of almost 20 percent.
Railroads are now poised to order more equipment to keep up with rising shipments of commodities such as grain and sand used in hydraulic fracturing for oil and natural gas. Over the past two quarters, GE Transportation has received $3.6 billion in new orders, the company said. Wabtec also expects to grow this year.
“North American freight market dynamics bode well for” Wabtec, Matt Elkott, a Cowen & Co. analyst, said in a note Sunday before the deal was announced. A tie-up with GE Transportation could generate operational synergies in excess of 20 percent, he said.
GE will sell a portion of GE Transportation to Wabtec and execute a spinoff of other assets, which will then be merged with Wabtec. The transaction, expected to close early next year, is valued at $10 billion after adjusting for the “net tax step-up value of $1.1 billion,” according to the statement.