GE Spin-off Overview

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Updated on June 22, 2018

On May 10, 2018, General Electric. (GE) announced that it intends to spin-off its Transportation Division and immediately merge it with Wabtec Corporation (WAB). The transaction will be structured as a Reverse Morris Trust and is expected to close in early 2019.

GE Spin-off Notes

Notes: GE Announces it is Selling its Industrial Engine Group – (June 25, 2018)

In addition to previously announced spin-off of its Transportation business, GE announced on June 25, 2018, that it has agreed to sell a unit that makes industrial engines for private equity firm Advent International for $3.25BN in cash
The assets being sold are GE’s so-called distributed-power business, which makes Jenbacher and Waukesha gas engines.
Distributed Power, part of the GE division that also builds gas turbines and electrical equipment, produces heavy-duty engines that generate power and heat for industrial facilities.
These truck-sized machines, often painted bright orange or green, are used to generate electricity in remote areas, along with other industrial operations requiring a mechanical drive.
The business, which has about 3,000 employees, posted sales of $1.3 billion last year.
Deane Dray, an analyst with RBC Capital Markets, said in a note. “Distributed Power was operated mostly as a stand-alone business within the GE Power portfolio, so we do not foresee any significant dis-synergies or complications with separating it in a sale.”
The on-site turbines also are used on college campuses as a way to keep buildings running when the grid goes dark. Increasingly, small gas turbines are seen as the backbone of microgrids that are reshaping the way communities get power because they can back up supplies from solar panels or battery systems.
“We like the space because we see a couple of megatrends, namely decentralization, decarbonization and gas replacing diesel,’’ Advent managing partner Ranjan Sen said in an interview. While the buyout firm will explore additional acquisition opportunities to expand Distributed Power, the primary focus will be “to invest in product portfolio, distribution, digitalization and facilitate a fast transformation to a standalone business.’’
The deal, expected to close by the fourth quarter, unwinds two acquisitions by former CEO Jeff Immelt, who left last summer after 16 years at the helm.

Notes: GE Announces it Will Spin-off its Transportation Business then merge it with Wabtec (June 20, 2018)

GE announced on May 21,2018 it will merge its Transportation business with Wabtec
GE initially increased 2% to $15.26 but has since declined to $12.90 (as of June 22, 2018)
Will create a global leader for rail equipment, services and software
Pro-forma company will have approximately $8bn in revenue, a more diversified business, higher margins, 15 percent cash EPS accretion in year one
GE said it has a backload of 1,800 new locomotives and about 1,000 locomotives to be modernized – $18BN – [is backlog binding? How easily can it be cancelled?)
Both businesses are expected to benefit from the continued industry tail winds
Complementary businesses and large global installed base will create additional opportunities for cross selling and other new opportunities
GE transportation is positioned for a substantial rebound
Estimated EBITDA will grow from $750MM in 2018 to $900MM to $1BN in 2019
Annual synergies of $250MM expected
Structure will be a Reverse Morris Trust
WAB has $9BN market cap
Transaction value is approximately $10BN
GE market cap is $123BN so there could be some indiscriminate selling
Under the agreement, GE will receive $2.9BN in cash and GE shareholders will receive 50.1% of shares in new company
Looks like Wabtec is more focused on freight, transit, and electronics solutions
Transaction is expected to close in Q1 2019
Steps:
1. GE will sell a portion of the assets of GE Transportation to Wabtec
2. Complete the spin-off or split-off of a portion of GE transportation to GE Shareholders
3. Immediately thereafter merge GE transportation with a wholly owned subsidiary of Wabtec
The locomotives industry has extreme cyclicality. And demand troughed in 2017
This cyclicality has hurt both GE Transportation and Wabtec
Wabtec’s Raymond Betler will remain President and CEO of the merged company

Our Thoughts on GE Spin-off

At a high level, this could be an interesting set up as WAB estimates pro-forma equity value will be $20.4BN, significantly smaller than GE ($112BN market cap). GE shareholders will own 51% of pro-forma company. So there is the possibility of indiscriminate selling. More work to do.

Resources from GE

Press Release

Spin-off Webcast Replay

Transaction Slide Deck

No Form 10 Available

Other Resources

Bloomberg – GE Agrees to Sale of Gas Engine Business to Advent (June 26, 2018)

WSJ – GE Nears Deal to Sell Industrial Engines Business to Advent (June 26, 2018)

WSJ – GE to Merge Rail Division with Wabtec in 11 Billion Deal (May 21, 2018)

Seeking Alpha – GE Wabtec Merger Good News Already Priced In (May 21, 2018)

WSJ – GE Chief Gives Cautious Outlook for Power Business (May 23, 2018)

Seeking Alpha – GE’s Brilliant Move (May 23, 2018)