GE (GE) has agreed to merge its transportation business with Wabtec, an American manufacturer of train equipment, in a deal worth $11.1 billion, the companies announced. GE will receive a $2.9 billion cash payment up front, and GE and its shareholders will own 50.1% of the combined company.
Among other things, GE’s transportation business manufactures freight and passenger trains, marine diesel engines and mining equipment. Spinning off the division will be the biggest deal yet for CEO John Flannery, who took over in August. Here’s why GE wants the deal.
Streamlining
It’s no secret that GE’s share price has plummeted in recent years. Cutting costs and helping the company’s stock recover are the two corner stones of Flannery’s mandate. By spinning off the transportation business, Flannery hopes he’ll be able to start returning value to shareholders. The company’s share price is currently down 14% year to date, and 47% over the last 12 months.
Poor performer
The transportation business is the company’s second-smallest unit by sales, and it has struggled to perform amid train industry budget cuts and strong competition. In 2017, the unit posted an 11% decline in revenue. The $4.2 billion the transportation unit made in 2017 was $1.7 billion lower than its earnings just two years prior.
Low risk, high reward
The merger with Wabtec is reportedly being managed as a Reverse Morris Trust, in which a company spins off a part of its business and merges it with another one simultaneously. It allows huge tax savings compared with other arrangements. Given GE’s current concerns, the savings are likely an appealing element of this deal.
Force of habit
The transportation business is not the first one GE has divested from in recent years. Under CEO Jeff Immelt, the company let go of NBC and their plastics, appliances, and capital businesses. Those decisions helped boost the company’s stock, so it’s no wonder it would seem like an attractive option. Indeed, after news of the potential merger broke, GE’s stock rose nearly 2% in pre-market trading.