Haier Group’s planned $5.4 billion acquisition of the home appliances division of General Electric underscores the Chinese white goods maker's domestic and international growth ambitions.
The deal, announced on Friday, brings together two companies that are the second-largest players in their respective home markets. It is also the year's largest merger or acquisition to date and the third-biggest ever Chinese acquisition of a US company, according to Dealogic, pushing Dalian Wanda’s just-announced $3 billion takeover of Legendary Entertainment into fifth place.
Haier has an 8% share of the Chinese home appliance market, which includes refrigerators and washing machines, versus market leader Midea Group's 17% share, according to research company Euromonitor International.
Midea is also understood to have wanted to acquire GE Appliances, which is the second-biggest home appliances manufacturer in the US after Whirlpool with a 10% market share.
GE Appliances employs about 12,000 people across the globe and generated about $5.9 billion in revenue and $400 million in Ebitda in 2014. Haier is far larger. Its global revenues in the same year were $32.6 billion, while its profits were $2.4 billion.
Shanghai-listed Qingdao Haier, which purchased all of Haier’s overseas operations in June and is 50.8% owned by Haier together with US private equity group KKR, will acquire GE Appliances.
In a press release, Zhang Ruimin, chairman and chief executive officer of Haier Group, said: “This strategic alliance provides a new starting point for both Haier and GE.” He said he hoped the alliance and acquisition would enhance Haier’s value by developing the “autonomous innovation and cooperation” of its employees.
Haier said it will have the rights to use the GE brand for appliances for 40 years.
Hong Kong-listed Haier Group's share price rose 1% to HK$12.84 following the news, in contrast to Midea's, which fell 4% to Rmb28.39 in Shenzhen.
Global reach
Haier secured GE Appliances after winning an auction process that began in December. GE had originally intended to sell the unit to Sweden's Electrolux for $3.3 billion but the US Justice Department blocked that deal, claiming it would damage competition.
The GE Appliances purchase is the seventh overseas M&A deal announced by Haier to date, which includes the acquisition in 2012 of Fisher & Paykel, a New Zealand white goods manufacturer. The scale of the acquisition this time around, though, sets it apart as the combined value of the company's previous deals is just $6.3 billion, according to Dealogic.
By snapping up GE Appliances, Haier is able to penetrate an entire continent. The US company has in recent years refocused on its home market, bringing production back onshore to the point that 80% of its appliances are made in the US. As such, it has worked to make ‘Made in America’ a point of differentiation from its Asian rivals.
As a result, 88% of its sales are in North America, according to Euromonitor. In contrast, only 1% of Haier's sales are from the US.
That means the two have little geographic overlap. “These are incredibly complimentary leading white goods producers in China and the US,” an executive familiar with the transaction, said. “There is very little overlap between the two, which makes for a remarkable combination.”
Haier was the first Chinese company to establish manufacturing operations in the US. It opened a factory in South Carolina in 2000, mainly to make refrigerators, according to its website.
Emerging markets reach
By acquiring GE’s division, it may also be able to expand its presence into emerging markets.
“GE’s share is attractive to any appliance manufacturer seeking to gain a strong position through acquisition,” Feng Zhang, a consumer appliances industry analyst at Euromonitor International, said in a report about the acquisition on Friday. “Its customer base and established distribution channels in the US will give the potential buyer a competitive edge.”
It also gives Haier the opportunity to expand GE-branded goods into some of the world’s high-growth economies, in which the US company has very little distribution.
“The two fastest-growing regional markets projected for consumer appliances over 2015-2020 are [the] Middle East and Africa and Asia Pacific,” said Zhang. “There is plenty of room for growth in these markets, as only 1.1% of GE’s appliances sales volume comes from Asia Pacific and 0.5% from Middle East and Africa.”
That is appealing for a company seeking to both grow and diversify its revenues. However, Zhang at Euromonitor said it is likely Haier will need to do marketing to build name recognition of the GE brand in markets where it is more commonly associated with other sectors, such as healthcare and aviation.
Additionally, Qingdao Haier is not the only company to have spotted the opportunity in emerging markets; it will have to fight hard for market share.
“A key challenge in expanding GE appliances in Asia Pacific is the inherent, current, intense market competition," Zhang said. "The gap left by Japanese firms with declining sales and financial problems is being filled by aggressive South Korean and Chinese rivals."
Combining forces
In addition to agreeing to the sale of the unit, the two companies signed a memorandum of understanding to “cooperate globally and jointly pursue growth project in focus areas” such as the industrial internet, healthcare, and advanced manufacturing.
Under the terms of the agreement, Qingdao Haier agreed to keep GE Appliances headquartered in Louisville, Kentucky, and to keep the current management team in place.
The sale GE Appliances has long been in the offing. South Korea's LG Group and Samsung and Arcelik of Turkey were also interested bidders in two rounds of sales talks since 2008, according to Euromonitor.
Bank of America Merrill Lynch, and PwC Corporate Finance are advising Qingdao Haier on the M&A, while CICC is an independent financial adviser. Bank of America Merrill Lynch, China Development Bank, and China Construction Bank have agreed to finance the transaction. Goldman Sachs is advising GE Appliances.
