The merger will create a global transportation leader in rail equipment, software and services, with operations in more than 50 countries.
Wabtec and GE Transportation merger
The two companies will combine in a transaction in which GE will:
- sell a portion of the assets of GE Transportation to Wabtec;
- complete the spin-off or split-off of a portion of GE Transportation to GE shareholders;
- immediately thereafter merge GE Transportation with a wholly owned subsidiary of Wabtec.
Upon closing, Wabtec shareholders will own approximately 49.9%, and GE shareholders will own approximately 40.2%, and GE will own 9.9% of the merged company. The transaction is expected to close in early 2019.
General Electric on Monday announced it will merge its century-old locomotive business with Wabtec Corp. in a deal valued at $11.1 billion, capping months of speculation since CEO John Flannery announced divestiture plans last fall to improve stock performance.
The merger with GE Transportation will make Wabtec, a Fortune 500, a global transportation leader in rail equipment, software and services, with operations in more than 50 countries. Wabtec will have roughly $8 billion in revenues, a more diversified business mix, higher margins, and 15 percent cash EPS accretion in year one.
GE and its shareholders will own 50.1 percent of the combined operations, distancing the company from the cyclical rail market while still leaving it with an ongoing stake in the recovery of North American freight demand. Under the terms of the tax-free transaction, GE will receive an upfront cash payment of $2.9 billion.
“That is the current pattern with GE, as they did with Baker Hughes in the energy business. It means they free up capital, which should help their share price,” said Tom Davenport, Digital Fellow at the MIT Initiative on the Digital Economy and President’s Distinguished Professor of IT and Management of Babson College.
“Locomotives are a capital-intensive and slow-growth business, so I would think that’s why they are divesting themselves of parts of it.”
“Wabtec and GE Transportation are global industry leaders and we believe that together we have a unique opportunity to drive tremendous growth in 2019 and beyond as the industry continues to improve,” Wabtec CEO Raymond Betler said.
Both businesses are expected to benefit from the cyclical tailwinds they are experiencing as industry conditions improve.
Wabtec, which builds locomotives and offers services and other products to the freight-rail and passenger-transit markets, said it was attracted to the complementary products and a growing order book after several lean years for the industry. It generated $3.9 billion in sales last year, and expects to grow this year.
The deal will “improve our ability to address the cyclicality” associated with the freight industry, Wabtec CEO Raymond Betler said.
“Our two companies have more than 250 years of rail industry heritage, and our shared focus on safety, reliability, quality, and customer relationships will enable a smooth integration,” he added.
Betler will remain in the same role after the deal closes.
Rafael Santana, president and CEO of GE Transportation, will become president and CEO of Wabtec’s Freight Segment while Stéphane Rambaud-Measson will become president and CEO of Wabtec’s Transit Segment.
GE Transportation has about 9,000 employees worldwide. Despite the industry’s challenges, it is among GE’s most-profitable units. In 2019, it is poised for a substantial rebound, with estimated adjusted EBITDA growing from about $750 million in 2018 to between $900 million and $1 billion.
“Together, we can expand our global reach, strengthen our market capabilities and lead digital innovation across the transportation industry,” Santana said.
“We are seeing growth in rail traffic and recent promising orders for new and modernized locomotives from North American Class I, Shortlines and international railroads, and are confident in the compelling long-term opportunities and synergies before us.”
Wabtec’s headquarters will remain in Wilmerding, Pa. Wabtec’s Freight Segment will be headquartered in Chicago, while its Transit Segment will remain in Paris.
As railroads are poised to order more equipment to keep up with rising shipments of commodities such as grain and the sand used in hydraulic fracturing for oil and natural gas, both companies stand to benefit.
“North American freight market dynamics bode well for” Wabtec, Matt Elkott, a Cowen & Co. analyst, said in a note Sunday before the deal was announced. A tie-up with GE Transportation could generate operational synergies in excess of 20 percent, he said.
GE transportation has been ahead of competition when it comes to innovation in not just locomotives, but the entire railroad system. Read more
It teamed up with SAS and Infosys to develop EdgeLINC, a solution already being deployed on more than 1,000 locomotives by a Class 1 railroad in North America. EdgeLINC enables device-agnostic device management, configuration and edge analytics of real time data.
For example, it helps railroads manage their devices and make smarter decisions right at the point of decision, say, by a railway crew approaching a tunnel. By monitoring assets in real time and reporting on asset performance – it helps minimize downtime (idling of locomotives), damages, and most importantly, maintenance costs.
Its other digital solutions include Trip Optimizer, LocoVision, Movement Planner and Yard Planner, among others.
For example, the Trip Optimizer is automated, cruise control system that crunches data on route, road conditions, etc. to make an optimal fuel plan, resulting in 10% fuel savings on average. It has logged more than 300 million auto miles, saving customers more than 200 million gallons of fuel.
GE transportation has long said its innovation culture will continue, even if a divestiture were to happen.
“If a divestiture is coming, we plan to go forward as a preferred partner with GE Digital,” Garret Fitzgerald, GE Transportation’s VP and General Manager of Transport Intelligence has said.