Reports by Bloomberg of a potential sale of GE Transportation to Wabtec Corp. surfaced late Friday April 20, resulting in Wabtec shares gaining 4.5%. The potential transaction size is $6.8 billion, according to Bloomberg.
In an email, GE spokesman Tim Bader said, “We are evaluating a range of strategic options for our business, and do not comment on rumors or speculation.”
A spokesman for Wabtec said his company also had no comment.
“The Bloomberg report appears to suggest that GE Transportation’s valuation could be as high as $6.8 billion,” notes Cowen and Co. analyst Matt Elkott. “We believe this is too high, given what we see as Wabtec’s enviably strong position at the negotiating table. The company is still ironing out a few lingering transitory issues from its late-2016 acquisition of Faiveley, its largest ever ($1.74 billion). As such, it is in no hurry to embark on another big transaction unless it is extremely compelling.
“The Faiveley purchase raised Wabtec’s Long-Term Debt/EBITDA ratio from approximately 1.0x to approximately 2.7x, leaving it with limited room for incremental debt issuance. Additionally, Wabtec must realize that GE, which has long stated its desire to offload the transportation segment, may not have better avenues to explore.
“GE Transportation would likely be too large for many private equity investors. Alternatively, a spin-off of a locomotive business into public equity markets may not be well-received by investors, in our opinion. The rail equipment industry can be brutally cyclical, and companies operating within the space tend to target a high degree of diversification. Accordingly, this business may be better suited as a potentially synergistic addition to an existing diversified platform such as Wabtec’s. We note, however, that interest by large investment conglomerates or international entities cannot be ruled out.”
If a transaction does occur, “it will be closer to $6 billion, which is upon what we based our hypothetical accretion and financing analysis,” Elkott says. “Given Wabtec’s current leverage, we do not see debt issuance as the primary source of financing of a potential deal; and big reliance on new equity would limit accretion beyond the company’s and investors’ liking.”
Cowen has devised a hypothetical scenario consisting of 40% new equity issuance, 30% new debt, and 30% GE equity maintained in its transportation unit. “Accretion would be $0.88 per share, or roughly 22% relative to Cowen’s 2018 EPS estimate, as if Wabtec would have owned GE Transportation for all of 2018.
“Accretion could increase in 2019 and beyond if provisions are in place for Wabtec to gradually buy back GE’s equity stake using operating cash flows from the business,” Elkott notes.
Unknown is how Wabtec would integrate GE Transportation’s locomotive business with its MotivePower Industries subsidiary.