Thursday, 2 July 2015

Trouble in white goods land for Electrolux

One of the more interesting company related announcements after the European close yesterday was the observation from the US Department of Justice that Electrolux's proposed US$3.3bn acquisition of GE's US appliances business (which would combine the number two and three domestic appliance makers in the US and give Electrolux around 40% of the US market) is to be investigated.  Unsurprisingly this elicited a response from Electrolux and GE...


...and a share price reaction when Electrolux shares opened earlier today down around the SEK235 level (-10% odd).  


I was looking through my notes from the Q1 Electrolux announcements and back then I observed that: 

western Europe grew by 4 per cent in the first quarter
Sales in eastern Europe were down 10 per cent thanks to a sharp decline in Russia

organic sales declined by 0.5 per cent.

Margins were down on the same period last year at 1.8 per cent (2.9 per cent).

The acquisition of GE's appliance division is still progressing and expected to complete later this year. The company said today that in addition to synergies of $300m that were initially communicated, it had identified further synergies of $50m, mainly within purchasing – that’s better news.  

But that also...

Electrolux today announced that results for the business area Major Appliances North America will be significantly lower than anticipated in the first quarter.

Electrolux operations continue to be negatively impacted by the transition of the product ranges within refrigeration and freezers. This transition is a consequence of the new energy requirements imposed during the second half of 2014. Earnings are also affected by the ramp up of the cooking plant in Memphis, which has been slower than anticipated.

That Electrolux need this deal is obvious to me - especially as comparisons for many of their divisions toughen as 2015 progresses.  

I like some of the trends here (pricing positive, happy to keep pricing up at cost volume) but buying here clear hope on US deal not only occurring but also adding value for them.  So a ‘trust management’ call especially with the shares trading at a mid-teens EV/ebit multiple.  

I would prefer wait for the full set of Q2 numbers in a few weeks time and maybe the c. SEK225 level where support where the shares have exhibited some historic resistance/support.  One to watch however in the earlier part of the Q2 European earnings season.  

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