Electrolux and Ge Capital

Electrolux and GE Appliances case questions

1. Why does GE wish to sell its appliances business? Isn’t this unit GE’s brand image?

2. Why does Electrolux wish to buy GE Appliances? Doesn’t it already have the same products in the same markets as GE?

3. How has the prospective value of business changed in the past 8 or 10 years?

4. Why did GE invest more than a billion dollars in the business just 5 years ago? What has or has not changed since it made that investment?

5. What are the theoretical elements of the financial value of GE Appliances to Electrolux?

6. What more needs to be explored in the valuation of the GE Appliances business?

7. What more needs to be explored in the valuation of GE’s interest in Mabe of Mexico?

Mabe Interest The second component, and possibly the most difficult to value, was GEA’s 48.5% ownership in Mabe of Mexico. Mabe (Controladora Mabe S.A. de C.V.) was a leading player in Mexico and Latin America, with strong brand recognition and a wide geographic footprint. Operating in more than 70 countries, Mabe held a 50% market share in Mexico and the Caribbean, and a strong 25% market share across Central America. Mabe, privately held, had entered into a partnership with GE in 1987 in which Mabe would be an important subcontractor to GE. The partnership would give GE access to cheaper Mexican labor, while giving Mabe access to a global network for sales and distribution. Initially, Mabe produced just stoves and refrigerators for GE, but after it acquired GE Canada in 2005, it became a major supplier of clothes dryers and dishwashing appliances to GE Appliances as well. At one point, Mabe was supplying between 40% and 50% of all GE appliances, designed and manufactured in Mexico for sale in the U.S. With GE’s renewed investment in U.S. manufacturing facilities in the past four years, that percentage had dropped to 20%. Exhibit 8 illustrates the valuation team’s preliminary attempt at estimating the value of GE’s interest in Mabe. As a privately owned firm, financial details on Mabe were difficult to get. What Electrolux did know was Mabe’s top and bottom lines in 2013, and GE’s subsequent 48.5% share of profits, $35 million. Mabe still played a valuable role within GE, representing GE in many markets. As noted previously, Mabe owned GE Appliances Canada, as well as holding marketing rights to appliances sold throughout Latin America under the GE brand. Although this structure was both logical and effective for GE and GE Appliances, it was not clear that would be the case if GE Appliances was purchased by Electrolux. Some analysts wondered if Electrolux/ GE wouldn’t result in Mabe/GE competing against other Electrolux products in many Latin American markets. Others argued that a combined Electrolux/Mabe product line would be highly successful, with Electrolux already having a premium presence in Brazil, Chile, Argentina, Central America, and the Caribbean, and Mabe being a market leader on a volume basis in all of these same markets except Brazil.12 A variety of outcomes were possible, including Electrolux ending the GE brand licensing agreement with Mabe or, alternatively, Electrolux choosing to acquire Mabe outright at some future date. Synergies Often promised, seldom delivered. Common critique of synergy justifications in acquisitions .Electrolux’s valuation team was working out of the company’s corporate headquarters in Stockholm, Sweden. Its task was to complete both a valuation and suggested final offer for GE’s appliance unit by mid-August 2014, which meant that the summer holiday sailing on the archipelago would be lost. The team’s challenge was in capturing the value of GE’s appliance unit, both as a stand-alone business and as combined with Electrolux. GE would know that Electrolux would see added value in it—so-called synergies—and would be building that differential into its asking price. But the value of GE Appliances (GEA) had also fallen over time, as demonstrated by GE’s own efforts at selling the business repeatedly. There were two questions to answer: (1) what was GE Appliances worth; and (2) what should Electrolux offer? General Electric General Electric (NYSE: GE) was a conglomerate—a portfolio of businesses spanning many different industries. In an age of single industry pure plays and core competency, GE was strikingly different, continuing to compete in everything from turbine engines to financial services to appliances. GE, now in its 13th year under CEO Jeffrey Immelt, was in the midst of a transformation—as described by The Economist the previous month—to transform GE from a misfiring finance-heavy conglomerate into a more focused maker of industrial equipment.1 The company was shedding many of the businesses which it did not believe were capable of significant growth and profitability. GEA is at the top of that list. Appliances GE Appliances, a sub-unit of Home and Business Solutions, headquartered in Louisville, Kentucky, generated more than 90% of its revenue in North America. The product portfolio included refrigerators, freezers, cooking products, dishwashers, washers, dryers, air conditioners, water filtration systems, and water heaters. Its revenue split by major product category was approximately 35% cooking, 25% refrigeration, 20% laundry, 10% dishwashers, and 10% home comfort (air conditioning). GE Appliances was largely a U.S.-based business. Operations in the U.S. consisted of refrigeration units in Selmer, Tennessee, Decatur, Alabama, and Bloomington, Indiana; a cooking unit in LaFayette, Georgia; in addition to the largest and most diversified unit (laundry, dishwashers, refrigerators, water heaters) in Louisville, Kentucky. Louisville also served as the corporate center for GE Appliances. GE’s appliances, along with its lighting products, is in many ways the GE brand image. Founded in 1907, GE’s first products were cooking appliances. It continued to be a leader in appliance innovation for more than half-century, being the first to launch air conditioners (1950), the combined washer/dryer (1954), and the toaster oven (1956). Despite that track record, GE’s appliance business had shown little growth or profitability for more than two decades. GE’s appliance sales in 1990 were $5.3 billion, but only $5.7 billion in 2000, a full 1 “General Electric: A Hard Act to Follow,” The Economist, June 28, 2014.