After rumors over the weekend that GE would merge its Transportation business with the company Wabtec WAB, this morning the GE issued a press release confirming the transaction. Wabtec executives held a conference call this morning where they provided additional details of the transaction and answered analysts’ questions. Webtec has posted a recording of the call on its IR website.
In our brief review of this transaction, we think the deal is favorable to GE and its investors.
- GE will receive a cash payment of $2.9 billion for the transfer of its Transportation assets to Wabtec.
- GE shareholders will own 40.2% of the new company.
- GE will retain an ownership stake of 9.9% in the new company.
The price GE garnered for its Transportation business — which consists of manufacturing and servicing train locomotives (vast majority) and mining equipment (a smidge) — is slightly better than we had thought it could. This cash will help the firm reserve for its long-term insurance losses, announced earlier this year, whether through a direct cash injection or indirectly since not as much of its cash profits need to be set aside for reserve.
In addition, GE retains a minority stake in the business, in a deal reminiscent of the firm’s deal last year with Baker Hughes BHGE. Doing so, GE is essentially monetizing an asset that is not core to the company’s business while still retaining an interest in a business that is arguably at a low point in its cycle.
GE shareholders will receive shares in the new Wabtec, and because the new Wabtec is a pure-play rail equipment provider, it will be much easier for the market to assess its value than it has been to assess it as a tiny part of a huge conglomerate.
Wabtec — an acronym for Westinghouse Air Brake Technologies Company and a spinoff from a firm with a long and storied history — may be a good investment in its own right. Wabtec has been a major supplier to GE’s Transportation division, selling electronics and other components for the locomotives GE produces, and has been a major beneficiary of the regulatory mandate for Positive Track Control (PTC), on which the rail industry has been spending heavily on for several years. The locomotive business is at an historical nadir, so GE shareholders may be able to enjoy cyclical growth as the business improves. We will take a closer look at Wabtec and post a valuation model and Valuation Waterfall to members.
Both GE and Wabtec’s shares are trading higher today, suggesting that other market participants agree that the deal is a win-win for both parties.