Posted by: Diane Brady on May 14, 2008
Ask many Americans what they associate with General Electric and they’ll give you two words: light bulbs and ovens. Ask investors what they would like to see GE dropkick from its family and you’ll often hear the same words.
Now a piece in The Wall Street Journal says GE is about to put its appliances business on the auction block. While GE won’t comment on the report, offloading the unit makes a lot of sense. It could bring up to $8 billion into GE’s coffers and get rid of a business that no longer fits GE’s mission. GE may decide to spin off the business or get into a partnership, too.
Pundits will likely attribute the timing of this move to GE’s startling earnings miss last quarter. On April 12, GE announced a 6% drop in first-quarter earnings, related to the credit crunch, and CEO Jeff Immelt cut the company’s profit outlook for the year. The stock plunged 13%, amid a spate of analyst downgrades. The stock price issue has dogged Immelt, who took over for Jack Welch in September 2001 with the stock trading around $40 a share; it’s now hovering above $32.
Immelt has to do something to show he’s steering the $173 billion company in a better direction. And the $7 billion appliances business has been a sore point with Immelt for some time.
First, it’s not global. GE sells the bulk of its appliances to U.S. customers. That makes it hostage to the vagaries of the U.S. economy and, even more, to the volatility in the U.S. housing market. During the housing boom, that allowed the business to rack up double-digit earnings growth again and again. Now, it’s going the way of real estate prices.
Second, the business doesn’t let GE truly differentiate itself from competitors. There aren’t a lot of barriers to entry in building dishwashers, ovens and refrigerators. Everyone can put on the bells and whistles these days, and manufacture in cheaper markets than Louisville, Kentucky. And unlike, say, an aircraft engine or power turbine, there’s only so much service you can build around a microwave.
The appliances business has been a drag on profit margins, too. GE’s Industrial segment, of which appliances are a big part, kicks in a little more than 20% of GE sales but accounts for only 10% of overall earnings. Considering that, the appliances sale “is not surprising,” says James Ragan, an analyst at Crowell, Weedon & Co. “Immelt has made it clear they would be getting rid of lower-margin businesses.” Analysts cited a similar rationale for last year’s $11 billion sale of GE’s Plastics division to a Saudi Arabian company.
With its low margins and dim prospects, this is a business that should have left the GE fold while Jack Welch was still in charge. It’s about time they got rid of it.
A lot of folks within GE are no doubt feeling nostalgic about the prospect of losing an iconic part of the portfolio. But, from the moment Immelt stepped into the job, he recognized that the company’s appliance business was ultimately destined to be a thing of the past. The housing boom just allowed him to put off the decision for a while.
A complication of any potential sale of the unit, points out Ragan, is the fate of the famous GE mark on all those fridges and microwaves. “A buyer would want to have it,” Ragan says. Indeed, consider Sweden’s Electrolux, which sells its appliances with of the familiar names Frigidaire and Westinghouse (a far less successful conglomerate than GE). It’s unclear how appealing the GE Appliance unit would be, should GE not allow a buyer to continue using its brand.
(and thanks to Brian Hindo for additional reporting on this one)
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