General Electric Company (NYSE: GE) confirmed on Monday that it will be merging its transportation business with Wabtec Corp. ( WAB) in an $11.1 billion deal. GE stock initially traded higher by more than 2 percent following the announcement, but analysts say there are both pros and cons to these types of asset divestitures.
In the new deal, GE will merge its train engine division with Wabtec to create a company expected to generate $9 billion in annual revenues. In return, GE will get a 50.1 percent ownership interest in the combined company and receive a $2.9 billion up-front cash payment.
[See: 9 Dividend Aristocrats for Stable Income.]
The new deal is part of GE CEO John Flannery’s plan to divest GE’s non-core assets and focus on growing earnings in its core aviation, health care and energy businesses. The Wabtec deal comes less than two months after GE sold $1.05 billion in health care information technology assets to Veritas Capital.
Flannery has said he plans to cut $20 billion in assets from GE’s bloated balance sheet.
GE investors are hoping divestitures can help the company avoid another dividend cut. The stock dropped more than 30 percent after the company previously cut its dividend by 50 percent back in November.
Last month, Moody’s Investors Service lowered its GE credit outlook to negative and said it is at risk of a second credit downgrade in six months if the company can’t demonstrate “meaningful improvements” in free cash flow and/or stabilize its Power business.
While asset sales like the Wabtec deal help GE raise much-needed cash in the near term, J.P. Morgan analyst Stephen Tusa recently said that divestitures are bad news for free cash flow in the long term.
“On asset sales, I definitely celebrate a more focused GE, but if you’re selling locomotives or health care assets here, that’s just lost revenue and less opportunity to take costs out, so I believe those will ultimately be dilutive to earnings,” Tusa said, according to Barron’s.
Bank of America analyst Andrew Obin says GE still has a number of long-term cost-cutting opportunities, but the dividend may be at risk.
[See: 7 Stocks That Soar in a Recession.]
“We do not see the stock outperforming in the face of possible further negative earnings revisions,” Obin says.
Bank of America has an “underperform” rating and $17 price target for General Electric. J.P. Morgan has an “underweight” rating and $11 target for GE stock.
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General Electric Company (GE) Stock Surges on $11.1B Deal originally appeared on usnews.com
