With GE’s (GE) share price in freefall and concerns about its debt levels, the company began offloading assets left and right. One disposal arranged by short lived CEO John Flannery was the spinoff of its transportation business via Reverse Morris Trust by subsequently merging it with Wabtec (WAB) to form a leading freight car powerhouse. Manufacturing and servicing all done in one spot. The deal called for GE to receive $2.9b in cash, 9.9% of the combined company, while GE shareholders received 40.2%. That left Wabtec shareholders with 49.9% of the combined company.
Months later, GE has a new CEO in Larry Culp, the stock has been ripping and the company is working even harder to raise cash. As part of those efforts, to steal a line from the venerable Darth Vader, the deal with Wabtec has been altered.
GE will still receive $2.9b in cash, but the ownership stakes have changed. Wabtec will be the majority owner with 50.8%, GE the company will now control 24.9% of the combined entity and GE shareholders’ stake will decrease to 24.3%. As part of the arrangement, GE has agreed (subject to certain exceptions) to unload its entire stake by the third anniversary of the merger, but it cannot sell any shares in the first 30 days post-close.
To better understand the motivation behind the changes, look no further than Mr. Culp’s comments on the revised deal:
Today’s announcement is a significant milestone in GE’s portfolio transformation. With the increase in GE’s stake in Wabtec, and increased proceeds as we sell down this stake, this transaction will further strengthen our balance sheet and support our de-leveraging plan.
Nothing like making the bondholders happy with a little extra cash to help clean up the balance sheet. The other happy people will be the legal and financial advisers that got to take an extra bite of the apple on a deal that was already negotiated! It looks like shareholders come off a bit as losers. One significant consequence is that the transportation spinoff will now be taxable to shareholders since GE will be the minority owner of the combined company and thus ineligible for a Reverse Morris Trust.
The market’s initial reaction to the deal was quite positive, but JP Morgan’s C. Stephen Tusa took some of the air out a few days later. Mr. Tusa noted that although positive for bondholders, the deal is ‘couple of steps backward on a few fronts for the GE shareholder’ and that the company is ‘transferring asset value away from the equity holder’.
The deal is expected to close by the end of February and we will be hearing more from GE in the future as the company hurriedly works to slim down.
Disclosure: Author holds no position in any company mentioned.
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