Electrolux confirms talks over possible GE appliance acquisition

Electrolux has confirmed it is in talks to buy General Electric's – GE – home appliance business, following reports that the sale could fetch $2bn.

Bloomberg reported that GE had drawn interest from Electrolux and consumer product development start-up, Quirky Inc. Its sources said the potential sale of the century-old unit had come about as GE CEO Jeffrey Immelt 'focuses on industrial operations'. An official statement from Electrolux said: “There can be no assurances that an agreement will be reached.”

AB Electrolux (commonly known as Electrolux) is the Swedish multinational household and professional appliances manufacturer headquartered in Stockholm, Sweden. Year after year it is consistently ranked the world's second-largest appliance maker by units sold, after Whirlpool and has global domestic brands such as AEG, Electrolux, Frigidaire and Zanussi in addition to smaller, premium professional brands such as Dito, Kelvinator, Molteni in addition to Zanussi Professional, professional food preparation, cooking, ventilation refrigeration, and dishwashing equipment, all of which can be found in many commercial kitchens.

If the deal were to go through, with AB Electrolux’s acquisition of a significant consideration in the Thomas Edison founded giant, it would no doubt close the gap or see AB Electrolux come out in front, ahead of its closest rival in Whirlpool, the World's largest appliance maker by units sold.

MARKET UPDATE

By Katarina Gustafsson, Bloomberg News

STOCKHOLM — As Electrolux looks into purchasing the appliance business of General Electric, credit analysts say such a transaction may have dire consequences for the Swedish firm's credit profile."Electrolux was already close to a ratings downgrade, this accentuates even more the risk that the leverage is going to increase," Maxime Puget, an analyst at Standard & Poor's, said by phone. "If it's very high debt it could be more, but our main scenario today is a one-notch downgrade to BBB."

S&P put Electrolux on CreditWatch negative after the Stockholm-based company confirmed a report it was looking into the acquisition. That followed S&P's decision in October to cut Electrolux's outlook to negative. The appliance maker now faces a 50 percent risk of a downgrade, compared with a one-in-three probability before it revealed its interest in an acquisition.

If the deal goes ahead it "could materially increase" Electrolux's leverage, S&P said Aug. 18.

Debt derivative investors have already started to punish the company. The cost of insuring Electrolux bonds against default has risen 18 percent since Bloomberg first reported that the two companies are in discussions Aug. 13, according to ask price data from CMA, which is owned by McGraw-Hill and compiles prices quoted by dealers in the privately negotiated market.Electrolux five-year credit default swaps are now quoted at about 74 basis points, compared with 63 basis points before news of a potential deal. Swaps pay the buyer face value in exchange for the underlying securities, or the cash equivalent, should a borrower fail to adhere to its debt agreements.

GE could fetch at least $2 billion from the sale, people with knowledge of the transaction have told Bloomberg. No financial details have been disclosed by the companies.

If S&P downgrades Electrolux to BBB from BBB+, its bonds will fall in value and the company will have to pay a higher coupon when refinancing existing debt, according to Rickard Hellman, an analyst at Nordea Bank.

"According to my guesstimates they will probably go down to BBB, but there is also a risk for BBB-," he said. The outcome will depend on how any transaction is financed, he said.

A cut to BBB- would have "much bigger consequences" because the company would be close to exiting the investment- grade sphere, Hellman said.

The price impact of a ratings cut may be softened because Electrolux is a global brand, according to Maria Andersson at Swedbank.

"When it comes to these well-known names, one speaks of a certain blue-chip premium," she said.

Hellman at Nordea said that a cut by S&P to BBB would be of "no major danger" for bondholders because "Electrolux will still be such a strong name."

S&P is mainly concerned about Electrolux's net debt relative to its earnings before interest, taxes, depreciation and amortization, Puget said. Should the company go ahead with a purchase of GE's home appliance business, its net debt ratio could swell to well above its current level of two, he said.

"The rationale of the CreditWatch is clearly because of the financial implications of the transaction for the rating of Electrolux," Puget said. Depending on how the deal evolves, it could ultimately even "be neutral to positive for the business," he said.

Still, since Electrolux already has weak metrics in relation to their rating, the prospective acquisition is "definitely a risk" according to Hellman at Nordea. If they buy this, that's the nail in the coffin, then they will be downgraded.''

---

With assistance from Adam Ewing in Stockholm