Historic merger: $11 billion Wabtec, GE deal sees future in railroads
The first major move in General Electric's great unwinding targeted the Pittsburgh region on Monday, with the troubled conglomerate sending its century-old transportation business to a Wilmerding company that has an even longer legacy in the rail industry.
Wabtec Corp. has signed a $11 billion deal to merge with GE Transportation and fold the operation into its ever-growing empire of rail products and services. The combination is expected to more than double Wabtec's annual revenues to $8 billion and create a Fortune 500 transportation company with 27,000 employees spread across 50 countries.
The companies anticipate the deal — subject to a number of regulatory reviews, as well as approval by Wabtec shareholders — will close in early 2019.
The merger is a big bet that both companies can overcome slowing business on the freight railroads. GE Transportation, a Chicago-based business that has its largest facility in Erie, last year reported the lowest sales since 2010. Wabtec has been quickly moving away from the freight market.
Speaking with analysts Monday, the two companies’ executives expressed optimism that a rebound is on the way and portrayed the deal as one bringing together two manufacturers that have endured the test of time:
General Electric, co-founded in 1892 by Thomas Edison, and Wabtec, a company founded by George Westinghouse in 1869 as Westinghouse Air Brake Co.
“We believe that together we have a unique opportunity to drive tremendous growth in 2019 and beyond as the industry continues to improve,” said Raymond T. Betler, Wabtec’s president and chief executive officer, who called the deal a once-in-a-lifetime opportunity.
Over the years, Wabtec has grown largely through acquisitions — roughly a half-dozen a year, most of those involving small equipment-makers.
In 2016, it announced a $1.7 billion purchase of Faiveley Transport, a French manufacturer with expertise in the construction of transit rail systems. Then its largest purchase ever, the Faiveley deal was a bid to focus more on passenger rail systems. Transit sales totaled 64 percent of Wabtec's revenue in 2017, compared with 47 percent of revenue in 2016.
In combining with GE Transportation, Wabtec is now expressing faith in a rebound in the freight rail markets.
In a presentation to investors, Wabtec showed GE Transportation revenue growing as high as $4.9 billion in 2019, up from $3.9 billion in 2017. GE Transportation has about 23,000 locomotives in use around the world, bringing Wabtec new opportunities to repair and equip the vehicles.
Investors applauded the news, though a bit tepidly.
Wabtec’s stock price jumped more than 3 percent on Monday to close at $98.55, while GE's stock rose less than 2 percent.
Matthew Brooklier, an analyst for Buckingham Research Group in New York City, called the deal “a home run for both Wabtec and GE Transportation” given the pressure on General Electric to divest and Wabtec’s desire to expand globally.
New CEO John Flannery has been looking to downsize General Electric, which many investors believe has grown too big and convoluted over the years to include segments like electric power, aviation, transportation, health care. The company’s stock price plummeted by more than 50 percent in 2017.
The deal with Wabtec uses a complicated financial maneuver to avoid a big tax bill — and it is a possible blueprint for future GE divestitures.
General Electric will sell a portion of the assets of GE Transportation to Wabtec, spinning off another portion to GE shareholders, and then merge this portion with Wabtec. It’s an arrangement that allows for $1.1 billion in tax savings, if the IRS approves, the companies said.
Wabtec agreed to pay GE Transportation $2.9 billion in cash for the assets, and then Wabtec shareholders will get 49.9 percent of shares in the combined company. GE shareholders will retain about 40 percent and General Electric will get about 10 percent ownership interest in the combined company.
Wabtec’s corporate headquarters will remain in Wilmerding, and Mr. Betler will remain Wabtec’s president and CEO.
GE Transportation’s assets will be folded into Wabtec's freight subsidiary, which will be headquartered in Chicago. Rafael Santana, GE Transportation’s president and CEO, will lead that segment. He said GE is seeing growth in rail traffic and “recent promising orders for new and modernized locomotives.”
Mr. Betler has long wanted to use Wabtec’s advanced signaling, software and communications systems to bring rail networks into the 21st century. For example, Wabtec makes positive train control systems, a safety feature that can take control of locomotives to prevent accidents caused by human error.
Congress has required the installation of positive train control on the entire U.S. passenger rail network and freight railroads that carry hazardous substances.
Wabtec already supplies equipment to GE's locomotives, some of them carrying as much as $250,000 each in Wabtec-built compressors, brakes, electronics and automated control systems.
Financial analysts flagged the issue of debt. The acquisition "raises the potential for the company's already stretched credit," according to a report from S&P Global Ratings, which placed Wabtec's credit rating on a watch list until further notice.
Workers were cautiously optimistic.
GE Transportation announced last year it planned to move production of locomotives from an Erie factory to Fort Worth, Texas, putting as many as 575 jobs in jeopardy.
“There’s potentially a good outcome for Erie in this,” said Scott Slawson, president of the United Electrical, Radio & Machine Workers of America Local 506, which represents workers at that plant. “Instead of losing work, for a change, maybe we’ll gain work.”
Mr. Slawson, who led protests in April outside GE’s annual investor meeting in Imperial, said he is relieved that GE Transportation is merging with a Pennsylvania-based company in similar markets. Wabtec employs 700 people in the Pittsburgh region.
“It’s not like we’re dealing with someone who doesn’t understand locomotives,” he said. “There are some positive vibes about that.”
Daniel Moore: firstname.lastname@example.org, 412-263-2743 and Twitter @PGdanielmoore