General Electric - the most acquisitive industrial company - is about to get a whole lot more cash to spend on takeovers.
The $274-billion maker of jet engines and locomotives is nearing a sale of a chunk of its US private-equity lending assets for $12 billion. That's only the beginning: GE is shedding about $200 billion of assets under Chief Executive Officer Jeffrey Immelt's plan to divest the bulk of GE Capital.
"I have a hard time believing that he's not going to continue along the path of making acquisitions," said Scott Lawson, vice-president at Westwood Holdings Group, which oversees about $22 billion including GE stock. "GE is pretty big so you've got to do big moves to move the needle."
Immelt has said that maintaining a AA credit rating will be less important once GE is focused on its industrial businesses. That could free up $20 billion in borrowing capacity. All in, the company may have as much as $40 billion available for takeovers after funnelling some money toward share repurchases and dividends, according to Karen Ubelhart and Joel Levington of Bloomberg Intelligence.
GE probably won't use up all of its resources in one shot, and may not do something right away. Immelt is still trying to complete the $14-billion purchase of most of Alstom SA's energy business while selling off GE Capital.
Takeover possibilities include Bio-Rad Laboratories, a $4.3-billion maker of life-science equipment, and Flowserve Corp, a $7.3-billion maker of industrial pumps and valves. GE also could be a bidder for some of the assets that Baker Hughes and Halliburton will divest as part of their merger.
Pentair's pumps
Pentair, a provider of water pumps and filtration systems, is another option. At $11 billion, Pentair would be a bigger target, but it would be a good fit for GE and help the conglomerate expand beyond energy flow-control equipment. Danaher just made a big bet on filtration for life sciences with its $14 billion purchase of Pall Corp.
Seth Martin, a GE spokesman, referred to Immelt's previous comments about the Fairfield, Connecticut-based company's acquisition capabilities.
"We are going to do some acquisitions as time goes on," Immelt said on May 20 at an industry conference in Longboat Key, Florida. "These are going to be core bolt-on deals, good returns, mixture of growth and cost and take it from there."
Representatives for Irving, Texas-based Flowserve and Hercules, California-based Bio-Rad didn't respond to requests for comment. A representative for UK-based Pentair said the company doesn't comment on speculation.
Buying ability
GE could announce $30 billion in financial-asset sales by the end of June because of heavy interest from buyers, Immelt said at the May conference. A large portion of the proceeds will go toward buybacks and an increased dividend.
"They're going to have a mature capital-goods company at the end of all of this," said Ubelhart of Bloomberg Intelligence. Acquisitions "could lift the organic growth. They could do quite a big deal. I think they'd be pretty comfortable with $5 billion to $10 billion."
Ubelhart said GE's life-sciences unit in particular could benefit from the addition of higher-growth, less capital-intensive businesses. Life sciences make up a small portion of GE's almost $150 billion in revenue, but the company has said it wants to expand that. The health-care market has been a hot area for industrial peers such as Danaher, 3M Co and Royal Philips NV.
Bio-Rad, which makes tools for analysing biomolecules and for testing for diseases such as diabetes and sickle-cell anaemia, would fall into that category. The company has high gross margins and operations that are complementary to GE.
Industrial targets
Lawson of Westwood pointed to more core industrial targets such as Flowserve or Hubbell, a $6.4-billion manufacturer of electrical components. Westwood owns shares of Flowserve and Hubbell.
A representative for Shelton, Connecticut-based Hubbell didn't respond to a request for comment.
GE would get cost and revenue benefits from a combination, Lawson said. Flowserve is on the cheaper side after sliding 29 per cent in the last year on the plunge in oil prices.
Like Flowserve, Pentair makes products for the energy industry. It also provides filtration systems and water pumps for industries ranging from beverages to pool equipment. That could make it appealing for GE, said Walter Todd, who oversees about $1 billion as chief investment officer for Greenwood Capital.
GE could consider just buying Pentair's valves-and-controls business, rather than the whole company, Ubelhart of Bloomberg Intelligence said. An activist could get involved and encourage Pentair to sell that division, which has room for improvement, she said.
Next step
Whatever the target, acquisitions are likely a next step in GE's transformation after asset sales and returning capital to shareholders.
"They've got a number of other initiatives going on right now," said Deane Dray, an analyst with Royal Bank of Canada. "But all of the goings on at GE Capital and Alstom do not turn away the possibility that they will be looking for deals."
© Bloomberg
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