General Electric (GE 11.14, +0.97, +9.54%) took another big step in terms of shedding non-core
assets of its business and paying down debt when it announced this morning that
it has agreed to sell its BioPharma business to Danaher (DHR) for a total
consideration of $21.4 bln, including $21 bln in cash as well as Danaher's
assumption of some pension liabilities. GE expects to use proceeds to pay down
debt and to strengthen its balance sheet. The transaction is expected to close
GE, a global industrial conglomerate that operates in a variety of industries with products ranging from aircraft engines to power generation and from oil and gas production equipment to medical imaging, financing, and industrial products, has been working on effecting a turnaround. The company has simply been performing poorly as it labors under a bloated cost structure. Investors, including activist investor Trian Fund Management, seeking changes to improve underperformance, finally had a wish answered when CEO Jeff Immelt announced in June 2017 that he would step down.
Immelt's long tenure (which had spanned back to 2001, when he took over from Jack Welch) was initially seen as a positive, as the world was then entering the digital age. However, Immelt's ensuing track record was mixed at best. His detractors, viewing his leadership negatively, and critical of runaway costs and some questionable M&A decisions made during his tenure, would have preferred to see him removed from his position years before his actual resignation.
GE hired John Flannery, formerly CEO of GE Healthcare, as CEO but then replaced him in October 2018, after just 14 months, with Lawrence Culp, who was known for doing a good job in terms of turning operations around at Danaher, where he had served as CEO and President between 2000 and 2014. On this point, it's probably not a coincidence that Danaher is the company purchasing GE’s biopharma unit as Culp likely still has some deep contacts at Danaher.
The BioPharma business being divested to Danaher is part of GE Life Sciences. In 2018, the BioPharma business generated revenue of approximately $3 bln, and that revenue is expected to grow to about $3.2 bln in 2019. The unit provides instruments, consumables, and software that support the research, discovery, process development, and manufacturing workflows of biopharmaceutical drugs. The business comprises process chromatography hardware and consumables, cell culture media, single use technologies, development instrumentation and consumables, and service.
In sum, the deal seems to make sense for both parties. Danaher is known for achieving success in terms of integrating acquisitions. Also, roughly 75% of GE Biopharma revenue is considered recurring in nature, which is attractive. It's good for GE as well as it keeps the company on its path of paring down its business. It also helps them pay down debt; at 17x expected 2019 EBITDA for GE Biopharma, that's a pretty good multiple for GE.
GE still has a long way to go. Its Power segment is seen by many as a bloated mess. In particular, GE made the questionable decision to purchase Alstom's power unit in 2015 for $10 bln. The deal has been criticized for being mistimed, as the coal and gas markets have weakened. The Power unit has really been struggling as its utility customers have shifted increasingly toward renewable energy sources, like solar. GE has seemed to make big bets on markets that are declining, to the chagrin of investors.
With that said, and with the stock up +13% today, investors are clearly happy with today’s news and with the multiple they are getting. More action will be needed, but today's action is a positive step in terms of turning GE around.
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