GE’s Shrinking Market Share Creates a Conundrum
(Bloomberg Opinion) -- General Electric Co. can’t live with a fixation on market share, but it can’t live without it, either. The embattled conglomerate, having long run its business with the goal of being the No. 1 or No. 2 player in each of its industries, saw its lead in the gas turbine market shrink in 2018. GE captured 33 percent of orders in 2018, down significantly from its 10-year average of 43 percent, according to an analysis of McCoy Power Reports data this week by Barclays Plc analyst Julian Mitchell. It’s also below the 40 percent market share that Rob McKeel, chief marketing officer of GE’s power unit, told the Financial Times in August he expected for 2018. The market as a whole continued its downward spiral, with ordered capacity coming in at the lowest level since 2002, Mitchell notes.
To the extent you can put a positive spin on this, it’s that the price discipline promised by former GE CEO John Flannery and his successor Larry Culp is finally taking root in a power business that prioritized growth over profits for far too long. GE booked a $350 million charge in the fourth quarter for project overruns and execution issues and took a $400 million writedown on contract assets – agreements for which it booked earnings in advance of cash flow – as it recalibrated overly optimistic assumptions on utilization in some regions and the price and cost of servicing turbines. On last month’s earnings call, Culp said he was encouraged by the progress GE has made in combing through the post-2016 underwriting class of its project book. While that suggests more losses could be in store for the power unit as GE tackles older parts of the backlog, Culp vowed to focus on profitable market share going forward.
Interestingly, Mitsubishi Heavy leapfrogged Siemens AG to clinch the No. 2 spot for the first time, with a 30 percent market share. Among the newest-generation turbines, known as post F-class, Mitsubishi booked 49 percent of orders, versus 34 percent for GE, according to Reuters. Mitsubishi’s 2018 market share gains were fueled in large part by one key contract win in Thailand, so it’s risky to read too much into the data. Even so, the heightened competition over a paucity of new orders underscores the challenges GE faces. It has to keep revenue coming in the door, and that will likely entail some sacrifice of its new-found price discipline for the foreseeable future. Despite some positive signs on utilization rates, GE CFO Jamie Miller acknowledged pricing pressure on some of its service contracts, which she said the company can “often” offset with cost productivity. Meanwhile, Iraq’s electricity minister told the FT that the government lacked the resources and processes to firm up contracts with GE and Siemens to overhaul its power grid. The two companies’ fierce battle over this project means it’s unlikely to be a particularly profitable one, but it was an opportunity for a revenue injection that now looks up in the air.
BE MY VALENTINE
Ingersoll-Rand Plc this week said it would pay $1.45 billion to acquire Precision Flow Systems, a maker of metering and condensate pumps. Ingersoll-Rand doesn’t often do big takeovers: the Precision Flow deal is its largest in more than a decade. That’s partly because of its stringent takeover criteria. Precision Flow hits the sweet spot, with about 50 percent recurring revenue and a high-20 percent range adjusted Ebitda margin. But a review of Ingersoll-Rand’s past major deals such as the $10 billion purchase of air conditioner-maker Trane Inc. in 2008 suggests the company only opens its wallet wide when it’s looking to make a strategic shift. The Precision Flow deal will almost quadruple the revenue for a fluid-handling products business some Ingersoll-Rand investors may not even have known existed. To me, this spotlights how much of a smorgasbord Ingersoll-Rand is. With speculation of consolidation in the HVAC industry heating up, the time may be right for Ingersoll-Rand to capitalize on that and create a stand-alone structure for that business. Some sources have pointed out that the Precision Flow deal could be Ingersoll-Rand’s way of reinvesting in its conglomerate identity. But I can’t see a pump-HVAC combination being terribly compelling or logical to investors of the activist variety.
Amazon.com Inc. led a $700 million equity investment in electric-truck startup Rivian Automotive LLC, with General Motors Co. also reportedly in talks for a stake or potential collaboration. The draw for Amazon is the chance to power its growing delivery aspirations with a fleet of eco-friendly vehicles. It’s an ideal use for battery-powered cars because the designated start and stop points mitigate concerns about range amid a shortage of charging stations. United Parcel Service Inc. and FedEx Corp. have both reserved electric semi-trucks from Tesla Inc. and have partnerships with a variety of other startups. Amazon’s planned Rivian investment is further proof that it increasingly sees itself as playing on the same field as the logistics incumbents, albeit with an investor base that’s much more amenable to moon-shot projects that cost gobs of money. GM investors have decidedly less patience, and the car company’s decision to allow someone else to do the manufacturing legwork on an electric truck seems like an acknowledgment of that. Earlier this month, GM disclosed an incentive package that will reward the CEO of its Cruise self-driving unit if the company sells the unit or takes it public within 10 years. Separately, Ford Motor Co. is discussing a framework for Volkswagen AG to invest in its Argo AI autonomous-vehicle startup at a $4 billion valuation.
It was a rough week for tax-incentivized job promises. Amazon killed plans to build a new campus in New York after political pushback, while GE said it would sell the Boston property that was meant to house a futuristic headquarters planned by former CEO Jeff Immelt. GE picked Boston because Immelt thought the city was a better fit for his much-hyped pivot toward industrial software than the company’s legacy Fairfield, Connecticut offices. Three-quarters of the 800 employees GE initially promised to have in Boston were meant to be digital industrial product managers. Well, Immelt’s successors recognized the digital business for the ill-conceived money-suck that it was and significantly curtailed the operations. GE now expects to have only 250 people working at the Boston headquarters, according to the Boston Globe. It will still use the existing buildings on the campus in the Fort Point neighborhood, but it will be a tenant, rather than the owner, and it’s scrapping Immelt’s plan to build a fancy tower. GE will use the proceeds from the land sale to repay the $87 million the state of Massachusetts spent to help the company acquire and develop the property. With GE’s power unit burning through $2.7 billion of cash last year and a breakup in the works, it’s unsurprising that the company isn’t in a position to splurge on extravagant new offices. But this is another in a growing list of indignities for the fallen industrial giant. We’ve come a long way down from the views at the top of 30 Rock.
DEALS, ACTIVISTS AND CORPORATE GOVERNANCE UPDATE
Virgin Trains USA was set to go public this week, but on the day its shares were set to price, it abruptly said “never mind.” Officially, this is because Virgin Trains found alternative financing sources that would allow it to pursue its plan to develop high-speed rail service away from the scrutiny of public markets. But it may also have to do with the fact that Virgin’s initial public offering was expected to price below the targeted range of $17 to $19 a share, with appetite for such a speculative bet running low in a volatile market. Virgin already offers service between Miami and West Palm Beach, but it wants to expand along the Florida corridor to connect passengers to Tampa and Orlando, home of Disney World, and develop a route between Southern California and Las Vegas. These plans have been prone to delays and entail heavy spending: on top of the IPO, Virgin was discussing as much as $2.3 billion in debt financing for 2019. California Governor Gavin Newsom’s announcement on Tuesday that he would scale back expensive plans for a separate high-speed rail project between Los Angeles and San Francisco hardly would have fanned enthusiasm for Virgin’s IPO.
Osram Licht AG confirmed buyout talks with Bain Capital and Carlyle Group, with the suitors reportedly on track to make a bid by the end of March. Siemens took the lighting business public in 2013 and then sold the last of its stake in 2017, avoiding a subsequent slide in Osram shares as the company contended with a slowdown in the automotive industry and, more recently, weaker demand for consumer electronics. Osram supplies laser diodes for devices such as the Apple Watch and iris scanners used in Samsung smartphones. On the one hand, there’s not much Osram can do about global trade tensions and a slowing Chinese economy. Lighting in general has been challenging of late. On the other, the smartphone and automotive markets were key pillars of the strategy shift that sparked a public spat between Osram CEO Olaf Berlien and Siemens CEO Joe Kaeser a few years ago. When reports first surfaced of private equity interest in November, there was some question of whether Osram would want to sell at such a depressed level. The fact that talks have advanced suggests a takeover premium is the best idea management has to boost its share price in the near term.
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Brooke Sutherland is a Bloomberg Opinion columnist covering deals and industrial companies. She previously wrote an M&A column for Bloomberg News.
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