July 10, 2008 / 7:59 PM / 11 years ago

GE's planned spin-off signals failed auction

LONDON (Reuters) - General Electric Co’s (GE.N) announcement it will look at spinning off its entire consumer and industrial business rather than selling its appliance arm may signal another failed auction.

GE Chairman and Chief Executive Jeff Immelt rattled off a list of names he said were interested in the appliance unit in May. But the change in plan suggests GE decided it couldn’t get a high enough price as prospective buyers struggled to finance a deal that would involve heavy exposure to a lacklustre U.S. economy.

A source close to one prospective buyer had described valuing the unit as being like trying to catch a falling knife. Estimates ran from $4 billion to $8 billion, but people close to interested bidders had expected GE to go for a spin-off if offers looked likely to come in towards the bottom of that range.

Low offers have become common in the United States as tightening credit markets have made it more difficult and expensive to raise funds for acquisitions, leading to a slowdown in deal activity and a slide in asset prices.

Private equity buyers are having to face up to the idea that they probably overpaid during their zealous shopping sprees for companies in the past two years and some of these investments may now run into trouble in an economic downturn.

Deals that have collapsed since the credit crunch set in last year include audio equipment maker Harman International Industries Inc HAR.N, equipment renter United Rentals Inc (URI.N), student lender Sallie Mae SLM.N and Penn National Gaming (PENN.O).

In Europe, France Telecom’s FTE.PA proposed $40 billion bid for rival TeliaSonera TLSN.ST and the auction to private equity of Italian luxury goods company Roberto Cavalli are just two recent deals that have fallen apart.

Immelt listed Haier(1169.HK), GE’s Chinese rival, South Korea’s LG Electronics (066570.KS), Sweden’s Electrolux(ELUXb.ST), Mexico’s Controladora Mabe and Turkey’s Arcelik (ARCLK.IS) as obvious bidders, raising the possibility of a newly ambitious emerging market player buying a well-known U.S. brand.

Asian companies, in particular, are on the hunt for Western acquisitions with a technology, expertise or brand they can use to profit from their own booming economies.

Haier, keen to grab what could be a last opportunity to buy a U.S. business with a household name, had appointed Citigroup (C.N) to advise it and had looked at the possibility of finding a private equity partner to help finance a bid, sources close to the matter said.

But Haier has also been up against government reluctance to back a bid because of concern the company lacks the international experience to take on such an acquisition.

Controladora Mabe and Electrolux also had appointed advisers, a person close to the matter said.

Meanwhile, private equity firms were keen to get involved but faced a challenge raising finance for large deals. Otherwise, they were expected to try and help out an industrial player only interested in part of the unit.

LG, for example, was said by analysts to be interested only in commercial air conditioning and not the whole unit.

The new spin-off plan involves adding in lighting and other industrial products that combined with appliances make about $13,3 billion in annual revenue.

It was not too late for a determined bidder to come back and offer GE enough money for the appliances unit to dissuade it from the change in plan, a source close to a potential buyer said.

With reporting by Marie-France Han in Seoul, George Chen in Shanghai, Michael Flaherty in Hong Kong, Jui Chakravorty in New York, Scott Malone in Boston; editing by Leslie Gevirtz

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