General Electric Co (GE.N) is exploring a sale of its industrial gas engine business that could be worth as much as $2 billion, according to people familiar with the matter. The move comes after Chief Executive Officer John Flannery, who took over as CEO last summer, indicated to analysts and investors for the first time last month that he was open to breaking up the company and said that a spinoff of any of its units, which include power, healthcare and aviation, was a possibility.
A sale would help GE streamline its Power division which experienced a double digit revenue decline in Q4. GE is rumored to have hired Citigroup (C) to lead the sales process. Below are my questions and thoughts on the potential sale.
Why Would Anyone Want To Buy GE’s Problems?
In my opinion, this sounds less like a sale and more like GE’s attempt to fob off its problems onto someone else. The question remains, “Why would anyone want to buy GE’s problems?” GE’s operations are currently in disarray. Revenue from its core Industrial products grew an anemic 3% Y/Y; it did not help that Power Systems – its bread and butter – was off 15%. Segment profit fell 39%, with Power Systems off 88%.
There is excess capacity within Power Systems. Demand has slowed for traditional power plants that burn coal, natural gas or petroleum to produce electricity. Alternative energy sources like wind and solar systems are disrupting the power industry, and they could take more market share in the future. GE’s $10 billion acquisition of Alstom’s (OTCPK:ALSMY), (OTCPK:AOMFF) Power division two years ago might have hastened the unit’s demise. The $50 billion in turbine services backlog and $3 billion in cost-synergies expected from the deal have not materialized.
GE’s management admits the Alstom deal has been a disappointment. In effect, Alstom fobbed off its problems onto GE. Why would potential buyers of the industrial gas engine business want to repeat GE’s mistake? As Power continues to lose share to alternative energy sources it likely portends lower revenue and margin compression. This double effect could be difficult for potential buyers to price into a transaction at this juncture. It could behoove buyers to wait another 18 to 24 months to determine Power’s true earnings potential before considering a deal. By that time GE could be desperate enough to entertain a distressed sale at highly-attractive prices to a buyer.