Haeir is supposedly going to buy GE’s appliance business for $5.4 billion. The Wall Street Journal says that “GE Appliances and Lighting, of which appliances is the lion’s share, were $8.4 billion in 2014.”
One thing that I can’t figure out is if the sale is of a division that makes and sells appliances only in the U.S. or if it is a division that makes and sells appliances worldwide. Let’s assume that this is a U.S.-only division. I still don’t see how it can be worth only $5.4 billion.
The Census Bureau says that there are approximately 134 million households in the U.S. Thus the appliances division is selling for $40 per U.S. household. How can it be the case that GE can’t extract at least $40 in profit over the next 5-10 years from each American household? We bought a house that came with a GE refrigerator. When something went wrong with the icemaker it was about $450 to fix. Isn’t there $40 of profit just in that one repair?
GE seems to have roughly 20 percent of the U.S. appliance market (source), which would make the $5.4 billion acquisition equivalent to something like $200 in profit per household with GE appliances, but that still seems low.
[Separately, just two months after the ice maker repair, the same five-year-old side-by-side GE fridge stopped cooling, thus ruining everything in our freezer and refrigerator. It is running continuously and yet only about 32F in the freezer compartment and 50-55F in the fridge part, with frost all over the back plate of the freezer. I have unplugged it for an overnight rest in hopes that the problem was a frozen evaporator coil and it will start working again by itself. But maybe GE will get to make another profitable service visit?]
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According to the WSJ, the deal is valued at 10x EBIDTA, which is a generous valuation. A lot of companies get sold for much lower multiple. Last time GE tried to sell to Electrolux (turned down on anti-trust grounds) it got $3.3 billion which was 6x EBIDTA – a more typical valuation for a mature industry. So they are doing very well this time. (I want to know who their investment bankers were last time who left $2billion on the table and didn’t even get the deal done).
So how is it that GE only clears $540 million on sales of $8.4 billion? How could GM and Chrysler make NEGATIVE amount of money on the huge US auto market? They had huge revenues but even huger expenses – expensive union labor contracts, pension costs, a giant non-productive bureaucracy, etc. The same reasons why the Longfellow Bridge cost a zillion $ to rebuild.
The reason Haier was willing to pay more: 1. they figure that they can shed some of the costs (and not by moving the factories to China – Haier already has a US factory – appliances are big and heavy in relation to their value so it doesn’t pay to ship them from overseas except for the high end)). 2. that was their only hope of gaining market share – Haier has been trying to get into the US market for years now and has made very little progress except in small niches such as dorm fridges and window air conditioners where prices are very low and profit margins are paper thin. Actually they are already the #1 US appliance maker by unit volume but one $100 dorm fridge counts the same as one $2,000 French door fridge in that tally so by revenue they are not a player.
Haier incidentally only get the GE name for 40 years.
As a homeowner it really pays to learn simple appliance repair. Nowadays there are plenty of resources on the internet and the parts are available online (if they are available at all – NLA can be a big problem). I recently fixed my MIL’s top loading washing machine for $5.00 (broken motor coupling – a common failure point) , 1/2 hour of time and one slightly skinned knuckle (I can never do any kind of repair without bleeding at least a little). This would have been at least $150 or $200 if I had called a technician and the job consisted of very basic unscrewing of bolts, prying open clamps, etc. – the manufacturers make these things so that they go together quickly in the factory and they come apart just as quickly. Modern appliances tend to hide their working parts in a shell so we regard them as magical black boxes but once you learn how to open the black box the stuff inside is often very simple, almost primitive – they keep the same designs for decades on end.
A brand new GE icemaker costs around $100 online (assuming that it was not fixable or that you didn’t even want to try to fix it – if you are willing to take the thing apart you can sometimes fix it for free because it just needs to be unblocked or lubricated or some such) and is simple to install so between the cost of the service call and the inflated price they charged you for the parts you are out around$350. And you could have been done quicker than the time you spend waiting around for the tech to show up “between 12 and 4”.
“Haier incidentally only get the GE name for 40 years.”
They will probably buy the rest of GE for another $5.4 billion or less within those 40 years and get it permanently. 🙂
GE appliance business does not have ovens with steam assist so that knocks off billions from the value.
Five years ago, I bought a used, standard-size top+bottom 2-door, white Kenmore refrigerator of Craigs List for $100 for a rental property. I moved it myself. It’s been running perfectly, and able to adjust to very, very cold.
^ My 8000 btu GE window AC unit lasted just one year. Home Depot gave me a $100 credit on another one.
Compressors (the usual fatal failure point for refrigeration/AX equipment- icemakers break a lot more but they usually don’t condemn the appliance to the dump) fail on a curve. If you are unlucky you will get one that fails on the early part of the curve (but just beyond the warranty) and if you are lucky it may last for decades. I had one cheap Whirlpool that I use as a 2nd fridge fail just out of warranty – I replaced it and the virtually identical replacement has lasted maybe 15 yrs now – it’s just luck of the draw.
Kenmore doesn’t make any appliances. They buy them under contract from the major manufacturers. In recent times mostly Whirlpool & LG.