Electrolux regrouping after GE calls off deal

A General Electric Co. (GE) refrigerator and microwave oven are displayed for sale at a Lowe’s Cos. store in Torrance, California, U.S, on Oct. 17, 2013. Electrolux AB agreed to buy General Electric Co.’s home-appliances unit for $3.3 billion in cash in September 2014, a deal the Justice Department tried to block before GE ultimately called off the deal on Dec. 7.
A General Electric Co. (GE) refrigerator and microwave oven are displayed for sale at a Lowe’s Cos. store in Torrance, California, U.S, on Oct. 17, 2013. Electrolux AB agreed to buy General Electric Co.’s home-appliances unit for $3.3 billion in cash in September 2014, a deal the Justice Department tried to block before GE ultimately called off the deal on Dec. 7. Bloomberg

Electrolux is focusing on charting a new course and naming a new CEO for its Charlotte-based North American unit after General Electric on Monday called off the sale of its appliance unit to the Stockholm-based company.

Electrolux plans to keep its North American headquarters in the city after GE’s cancellation of the $3.3 billion deal, which the U.S. Justice Department had tried to block for antitrust reasons. Now, the Swedish appliance maker will work on research and development for new products while keeping its eyes open for new acquisitions.

The company didn’t say whether it will move ahead with the expansion of an R&D facility that would double the Charlotte headquarters’ size.

“Although we are disappointed that the acquisition will not be completed, Electrolux is confident that (it) has strong capabilities to continue to grow and develop its position as a global appliances manufacturer,” Electrolux Chief Executive Officer Keith McLoughlin said in a statement.

The GE deal would have been the biggest acquisition ever for Electrolux. It also would have made the Stockholm manufacturer surpass Whirlpool as the world’s largest appliance maker.

Electrolux said it made “extensive efforts to obtain regulatory approvals from the Justice Department and regrets that GE has terminated the agreement,” even as the companies were challenging a government lawsuit seeking to block the merger. A trial in federal court began Nov. 9, and the companies notified the judge Monday that the deal had been abandoned.

Under the contract for the merger, Monday was the first day that either company could back out of the deal, Electrolux spokeswoman Eloise Hale said. GE has requested a $175 million breakup fee from Electrolux, both companies said Monday.

The Justice Department said in a statement that the deal “was bad for the millions of consumers who buy cooking appliances every year,” adding “Electrolux and General Electric could not overcome that reality at trial.”

Electrolux shares dropped more than 13 percent to 207 kronor ($24.22) in Stockholm, the most in more than four years. General Electric shares closed down less than 1 percent at $30.37.

McLoughlin has acted as interim CEO of Electrolux’s North American division since April, when Jack Truong resigned from the position on the same day the company warned its earnings would be lower than expected. Electrolux will announce a new CEO of the Charlotte division “in coming months,” Hale said.

Lured in part by $27 million in incentives, Electrolux moved its North American headquarters to Charlotte in 2010. The company employs about 900 people at its offices in the University City area.

“Our headquarters will remain in Charlotte. We are committed to growing the business in Charlotte,” Hale told the Observer Monday.

This summer, Electrolux said it was evaluating whether to move forward with a planned $85 million expansion of a research and development facility until after it completed its GE purchase.

Longbow Research analyst David MacGregor said while he can’t say for certain what Electrolux has in mind for the Charlotte expansion, the major appliances category in general is becoming much more “innovation-centric,” investing not just in new products but also accelerating the rate at which they bring new products to the market.

“I think you’re going to see everybody increase their investments in R&D over the next 12-18 months,” MacGregor said. “I can’t think of a better place for (Electrolux) to do it than Charlotte.”

Truong, the former CEO, said he thinks the canceled acquisition gives Electrolux a chance to reinvest more in research and development, bringing new products online more quickly and with better marketing.

“This is the opportunity for Electrolux to really get back to that core and really focus on investing in innovations here,” Truong said. “It’s really about getting back to the fundamentals, reinvesting in what makes Electrolux successful.”

Justice Department objections

Electrolux agreed in September 2014 to acquire GE’s Louisville, Ky.-based appliance unit. But this summer, the Justice Department sued, saying the merger would result in the companies dominating the U.S. cooking appliance market, alongside competitor Whirlpool, and creating what’s known as a duopoly.

For consumers, that would mean higher prices on appliances, federal authorities said.

But in court last month, Electrolux’s McLoughlin testified that his company would be able to keep costs down and sell products at lower prices under the GE acquisition.

“We disagree with the Department of Justice’s narrow view on a transaction that would have benefited consumers. The appliances market is dynamic and highly competitive,” GE spokesman Seth Martin said in a statement Monday.

The Swedish manufacturer sells appliances under the brand names Frigidaire, Tappan and Electrolux, while GE uses a number of names, including GE Monogram and GE Cafe as well as Hotpoint. Some analysts had suggested Electrolux would have had to sell GE brands and dilute the deal “significantly” to make it acceptable.

Experts have noted that the current administration has been successful in recent antitrust lawsuits. Earlier this year, for example, Comcast called off its planned purchase of Time Warner Cable after government opposition.

GE will seek an alternative buyer for the appliance division, which is “performing well,” the Fairfield, Conn.-based company said in a statement.

MacGregor, the Longbow analyst, said GE’s announcement Monday was “a surprise for everybody.” The trial seemed to have been moving in favor of the transaction, he added.

“The court was beginning to become more aware of the role of Samsung and LG in the U.S. market as competitors that are constraining price, precluding GE and Electrolux from creating an inflationary environment for those products,” MacGregor said.

Truong testified during the trial as a witness for the government about how Electrolux priced appliances during his term as CEO. He said Monday he initially thought the sides would come to an agreement but grew skeptical.

“As the trial went on, that didn’t seem to be in the equation,” Truong said.

Electrolux says strategy remains the same

In a call with analysts Monday, Electrolux said it would continue to grow its business organically and through acquisitions. McLoughlin did not provide details about specific countries or companies, although some analysts say the company should look to China, Bloomberg reported.

“From a geography standpoint ... we’re under-represented in certain emerging markets, so there’s opportunities there,” McLoughlin said.

The U.S. appliance market is one of the largest in the world and one in which Electrolux will continue to invest, McLoughlin added.

“We have a good strong position and we ... will be investing heavily in the market to participate in that growth with more R&D, more brand-building, more channel and segment expansion,” he said in the call.

Ray Groth, managing director at investment firm Axum and an adjunct professor at Duke University’s Fuqua School of Business, described Electrolux’s news Monday as “neutral to positive” for Charlotte.

It’s possible GE won’t invest heavily in its appliance division, a unit it’s still trying to sell. That would provide a competitive opportunity for Electrolux, Groth said. It’s also possible Electrolux decides to invest the money it’s saved into research facilities like the planned one in Charlotte.

“If you’re about to invest an awful amount of capital buying GE, you do kind of cut back everywhere else where you don’t have to spend,” Groth said. Staff writer Ely Portillo and Bloomberg News contributed.