Swiss power-grid maker ABB (NYSE: ABB) announced that it will buy General Electric's (NYSE: GE) industrial-solutions business for $2.6 billion. Many spectators feel ABB is getting somewhat of a bargain in this deal, but the sale of the underperforming segment is in keeping with new CEO John Flannery's efforts to cut costs and refocus the business on its core strengths.
In this segment of Industry Focus: Energy, show host Sarah Priestley and Motley Fool premium analyst Taylor Muckerman discuss what the deal means for GE and ABB.
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This video was recorded on Sept. 28, 2017.
Sarah Priestley: GE has also been in the news in the past week. On Monday, it was announced that Swiss power-grids maker ABB will buy General Electric's industrial-solutions business for $2.6 billion. ABB described the unit as an unloved child and pledged to upgrade the company's product offerings with its own technology, win back market share, and improve margins. The deal has been described as a bargain by some spectators, and it's rumored that GE cut its price demand after ABB refused its initial offer. The deal was only concluded after certain stipulations made by ABB were met that they could maintain the GE brand. The company has agreed to increase buying and selling from one another. This move is further in line with CEO John Flannery's plan to divest the conglomerate of its non-core assets. Taylor, was the industrial-solutions segment really GE's unloved child?
Taylor Muckerman: You know, I would probably have to be more intimately involved with a business to know that. But it was one of the poorer performing business units in terms of margins. They sold it for slightly less than 1 times sales. I think its margins are about half of what ABB has for a similar division. So there's some room for improvement there, and ABB has been an acquisitive company, so I think they can come in here, make some moves, and while you would imagine that some layoffs would take place, they did say that they might remove some people from the workforce of this industrial-solutions business, but they would try to find places elsewhere within ABB, because they do value the quality of employees that GE tends to hire. So they want to keep them in the fold, but they might just not have a fit within this particular business.
Priestley: Yeah, it's interesting when people view people like that as an asset. I think that's a good sign. Just to give people a background, the industrial-solutions segment sells a number of products like circuit breakers, switch gears, transformers, power systems, equipment. But essentially, what they offer is electrical solutions to get electricity from the grid to wherever it's needed in industry.
Muckerman: Yeah. They call it the last mile, basically from the service station to your home or business.
Priestley: And really, what I think ABB was trying to do with this is get access to the North American market, which they do, but I will be interested to see if they're able to up the margins they get from this. As you said, it's 6% margins. They're used to operating margins of about 15%. I think they're financing the deal with cash. Shares were up on the news. GE shares were down. Should we read anything into that?
Muckerman: No, I don't necessarily think so. This was kind of transparently noted when Flannery took over, that he would try to create his own GE, kind of. A lot of moving parts with this company. The water division is being sold off, now industrial solutions. Some people think transportation could be sold off. Others I've seen think that bits and pieces of healthcare could be sold off. And we all know that Flannery is quite aware of what the value of that business unit is, because that's where he was most recently employed, within GE healthcare. So certainly moving more in a direction of an energy production, energy development, and power production business unit here with their turbines and acquisition of Baker Hughes (NYSE: BHI).
I would be shocked if they sold entirely out of healthcare, because it is one of the more behind-the-scenes well-performing business units of GE. As far as ABB's concerned, they'll probably suspend their share buybacks for some time to allow some cash to finance this deal to flow through. But, yeah, all in all, it seems to be, I think, a worthwhile deal on both sides.
Sarah Priestley has no position in any of the stocks mentioned. Taylor Muckerman owns shares of General Electric. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.