GE to Merge Rail Division With Wabtec in $11 Billion Deal -- Update

By Thomas Gryta 

General Electric Co. agreed to merge its railroad business with Wabtec Corp. in a deal valued at about $11 billion, letting GE raise some cash to fund its turnaround and shed one of its oldest operations.

The transaction is the first major portfolio move in new GE CEO John Flannery's attempt to revamp the struggling conglomerate. Wabtec, formerly known as Westinghouse Air Brake Technologies Corp., makes equipment for transit systems and freight railroads and has a market value of about $9 billion, based on Friday's closing price.

GE will receive $2.9 billion in cash at closing. GE shareholders will own 40.2% of the combined company, with GE owning about 9.9% after the deal.

Wabtec shareholders will retain 49.9% of the combined company. Wabtec's current chairman and CEO will retain their positions after the deal, which is expected to close in early 2019.

GE has been looking at options for the transportation division since at least last fall. The segment mainly produces freight locomotives, which sell for millions of dollars apiece, along with mining equipment and marine motors.

Although GE is one of the world's biggest makers of freight locomotives, the business is cyclical and has been suffering lately from slack demand. In 2017, the unit's revenue slipped 11% and profit fell 23%. The division accounted for $4.2 billion of GE's total 2017 revenue of $122.1 billion.

The transportation unit is one of the smaller of GE's seven major business lines. The division had about 8,000 employees at the start of the year, down 2,000 from a year earlier, and compares with 313,000 at GE in total.

GE's diesel locomotives are primarily assembled in Fort Worth, Texas, and western Pennsylvania.

In the first quarter, margins and orders rose at GE's transportation business but executives said the market for new locomotives remained slow.

GE and Wabtec said they expect the combination to eventually generate about $250 million in annual savings as well as tax benefits currently worth about $1.1 billion. GE will nominate three directors to the combined company's board.

Wabtec, which said it will keep its headquarters in Wilmerding, Pa., had revenue of $3.9 billion last year, or about the same as GE's transportation division. Wabtec employs about 18,000 people, or twice as many as GE's transportation division.

Rather than a straight sale, the deal was structured in a way that would leave GE shareholders with a stake in a public company and avoid a big tax bill. It gives GE shareholders a chance to participate in the turnaround of the struggling business or cash out if they wish.

Mr. Flannery took over as CEO of GE last summer, intent on making major changes that resulted in a dividend cut, slashed financial projections and the overhauling of the board. GE is expected to reveal more about its portfolio plans soon, as Mr. Flannery is considering all options, including potentially breaking apart its three major units -- aviation, health care and power.

In October, Mr. Flannery promised to sell $20 billion worth of assets. Before the Wabtec deal, GE had announced a handful of deals totaling less than $4 billion. The company's century-old GE Lighting division has been on the auction block for more than a year.

Write to Thomas Gryta at [e-mail]

(END) Dow Jones Newswires

May 21, 2018 08:51 ET (12:51 GMT)

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