General Electric Co. rose the most in a month as Chief Executive Officer John Flannery took the biggest step yet in his plan to revitalize the beleaguered manufacturer: merging its century-old locomotive business with Wabtec Corp. in a deal valued at $11.1 billion.
GE and its shareholders will own 50.1 percent of the combined operations, distancing the company from the cyclical rail market while still leaving it with an ongoing stake in the recovery of North American freight demand. Under the terms of the tax-free transaction, GE will receive an upfront cash payment of $2.9 billion, the companies said in a statement Monday.
“This was the biggest, cornerstone move of the $20 billion in asset sales that has been announced so far,” said Nicholas Heymann, an analyst at William Blair & Co. The resulting stock gains could prompt value investors to take another look at GE, he said.
GE advanced 3.2 percent to $15.45 at 11:20 a.m. in New York, while Wabtec climbed 4.2 percent to $99.20. Both had gained the most intraday since April 20, when Bloomberg News reported that the companies were in deal talks.
Doubled Revenue
The combination transforms rail-equipment maker Wabtec, which will roughly double its annual revenue by combining with one of the world’s largest manufacturers of freight locomotives. The Wilmerding, Pennsylvania-based company said it was attracted to GE’s complementary products and a growing order book after several lean years for the industry.
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“This will improve our ability to address the cyclicality associated with the freight industry,” Wabtec CEO Raymond Betler, who will keep his role after the deal closes, said on a conference call. “We’re doing this at an attractive point in the cycle, with both companies just beginning to experience the tailwinds that will drive double-digit growth over the next few years.”
GE Transportation, which had about 8,000 employees at the beginning of the year, has faced falling sales after a decline in North American rail-shipping volume left an oversupply of trains. GE said in July that it would cut hundreds of jobs while ending most locomotive manufacturing in Erie, Pennsylvania, and shifting some work to a non-union factory in Fort Worth, Texas.
Despite the industry’s challenges, GE Transportation routinely ranks among GE’s most-profitable units. It generated operating income of $824 million last year, with a profit margin of almost 20 percent.
Rail Rebound
Railroads are now poised to order more equipment to keep up with rising shipments of commodities such as grain and the sand used in hydraulic fracturing for oil and natural gas. Over the past two quarters, GE Transportation has received $3.6 billion in new orders, the company said. Wabtec also expects to grow this year.
“North American freight market dynamics bode well for” Wabtec, Matt Elkott, a Cowen & Co. analyst, said in a note Sunday. Wabtec said the deal would generate savings and other operational gains of $250 million a year, as well as additional benefits.
Under the terms of the deal, GE will sell a portion of GE Transportation to Wabtec and execute a spinoff of other assets, which will then be merged with Wabtec. The transaction, expected to close early next year, is valued at $10 billion after adjusting for the “net tax step-up value of $1.1 billion,” according to the statement.
Wabtec, which builds locomotives and offers services and other products to the freight-rail and passenger-transit markets, generated $3.9 billion in sales last year. The company will keep its headquarters, and Chairman Albert Neupaver was reappointed executive chairman. Rafael Santana, currently CEO of GE Transportation, will run Wabtec’s freight segment.
Wabtec traces its roots to 1869, when it was known as Westinghouse Air Brake. It became independent in 1990 through a management buyout.
