February 25 has been a great day for shareholders of General Electric (GE). In the morning, the company announced a huge asset sale that few expect it to bring in billions of dollars worth of debt reduction for the struggling conglomerate, all in a minimal loss of revenue for the foreseeable future. This sale to Danaher (DHR) helps the company do what it needs at this time: Focus on reducing lift and streamline operations while finding its core and focusing on growth from there. All in all, I see this as one of the best features the company has done this year and one that will ultimately deliver genuine values to the shareholders as long as the rest of the company's reorganization continues well as well.
Look at the sale
According to a press release issued by General Electric's management team, the company signed an agreement whereby it will sell to Danaher's GE BioPharma business in exchange for $ 21 billion in cash, as well as the estimated $ 400 million pension obligations of the acquirer . GE BioPharma is engaged in a wide range of activities, some of which have been written here. These include the creation, marketing, and sale of disposable consumables such as Fortem-based products, chromatography savings, cell culture media, instrumentation development, and evolution-related services, and more. Previously, GE BioPharma was a subsidiary of GE Life Sciences, which is a sub-segment of the conglomerate's Healthcare segment.
In a previous article in which I spoke in detail about General Electric's management, actually selling or disposing of Healthcare (this was before management decided late last year to dispose of the segment), I actually compared it to Danaher as a comparable and suggested that the segment as a whole be worth probably $ 75.51 million. This may seem huge, but with revenues last year of $ 19.78 billion, up from $ 19.02 billion in 2017, and profits of nearly $ 3.70 billion compared to the 2017 dollar of $ 3,449 billion, it is certainly not unreasonable .
Not only does it seem to my decision to compare Healthcare to Danaher a wise one, it becomes even clearer that perhaps the actual value of the company may be greater than I expected. I say this because, while BioPharma is probably the best part of the segment (compared to other operations like digital imaging equipment, services related to said equipment and more, all of which are probably lower margin than specialized BioPharma operations), the fact is that the case is that BioPharma is expected to generate sales this year of just $ 3.2 billion (up from last year's $ 3 billion) and yet it is being sold for $ 21.4 billion. ] BioPharma quite varied set of operations. About 40% of sales come from North America, 30% come from EMEA operations (Europe, the Middle East and Africa), and the remaining 30% come from the APAC (Asia-Pacific) region. The Asia-Pacific should be considered a hot market for disposable products such as those created by Fortem because of the large and aging population of countries such as China. The fact that BioPharma already has a significant foothold in that market, with annual sales of nearly $ 1 billion, and that sales are expected to grow by at least 6% to 7% per year, makes sense. It is also worth mentioning that $ 2.8 billion of BioPharma's sales are particularly related to bioprocessing, and the remaining $ 400 million is allocated to other activities.
For those who wonder how Danaher will cover the transaction, it should be said that the company intends to issue equity worth about $ 3 billion to increase cash. At the end of last year, the company also had $ 787.8 million in cash and cash equivalents available, saying it would use some of these cash, but no doubt, most of the value of the transaction would come in the form of debt. For what it's worth here, the management said the weighted average interest rate on the debt it will use will be lower than 3% per year, plus it should be said that even though the purchase price of BioPharma is $ 21.4 billion, the company will only pay a net amount of $ 20 billion. This is because $ 1.4 billion will come back to it in the form of tax benefits.
This is all good for General Electric
General Electric is undoubtedly a great winner here. While Danaher will have an attractive new entity can create value, not just from growth, but from an estimated $ 100 million in annual synergies after year three, General Electric's debt reduction is a big plus. The big question, however, is what happens next. You see, late last year, it was announced that the health service for the company would be sold off, very likely through an IPO. However, this path no longer seems optimal.
Although I believe any IPO or complete termination and sale of health insurance is possible, CEO Culp said an IPO this year is unlikely. Instead, he mentioned that the company will be focused on managing the health service's core business going forward. While Culp has far more knowledge and experience on this than I do, we ask that we see a proper sale of the remaining assets, as it will reasonably result in tens of billions of dollars of further debt reduction and possibly freeing up extra money to allocate to the conglomerate key figures business. .
Based on the data provided, General Electric investors should be ecstatic at these latest developments. The sales price for this particular set of operations is higher than I would have expected, and it shows that my previous valuation of Health as a whole is probably an appropriate conservative figure, if not even conservative in terms of what reality will continue to show. In any case, this cash will help management solve many of the conglomerate issues, while the BioPharma transition from being a General Electric business to a Danaher company will help the latter continue to grow in an attractive, profitable, and competitive area.
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Enlightenment: I / We have no positions in any of the aforementioned shares, and no plans to start any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I do not receive compensation for it (other than from Seeking Alpha). I have no business relationship with a company whose stock is mentioned in this article.