GE to merge its Rail Division with Wabtec Corp.,

General Electric Co. has agreed to merge its railroad business with Wabtec Corp. in a transaction valued at about $11.1 billion, the companies announced today.

GE is one of the world’s biggest makers of freight locomotives, but its transportation unit has struggled to reverse falling profit and sales. The division is one of Union Pacific’s two locomotive suppliers; the other is Electro-Motive Diesel, which is owned by Caterpillar Inc.

The agreement has been approved by the boards of Wabtec and GE, with the transaction expected to close in early 2019, officials from both companies said in a press release.

Wabtec and GE will be combined in a transaction in which GE will sell a portion of the assets of GE Transportation to Wabtec; complete the spinoff or split-off of a portion of GE Transportation to GE shareholders; and immediately thereafter merge GE Transportation with a wholly owned subsidiary of Wabtec.

GE will receive $2.9 billion in cash upon closing, with GE shareholders receiving a 50.1 percent ownership interest in the combined company and Wabtec shareholders retaining 49.9 percent of the combined company.

The combination is aimed at making Wabtec a leader in rail equipment, software and services, with operations in more than 50 countries. After the transaction, Wabtec will have about $8 billion in revenue, a more diversified business mix, higher margins and about 15 percent cash earnings per share accretion in year one, officials said.

The combination will bring together two global leaders in rail equipment, services and software, combining GE Transportation — a global digital industrial leader and supplier to the rail, mining, marine, stationary power and drilling industries — with Wabtec’s broad range of freight, transit and electronics solutions, they said. Both companies are expected to benefit from the cyclical tailwinds they are experiencing as industry conditions improve, officials added.

The GE Transportation business is positioned for a significant rebound, with estimated adjusted earnings before interest, taxes, deprecation and amortization (EBITDA) growing from about $750 million in 2018 to between $900 million and $1 billion in 2019. The backlog of $18 billion includes abut 1,800 new locomotives and about 1,000 to be modernized.

GE has received $3.6 billion in orders in the past two quarters. Wabtec reported a strong first quarter, and also is forecasting robust growth for the year with record backlog.

Effective immediately, Wabtec Chairman Albert Neupaver has been re-appointed executive chairman, while Raymond Betler remains Wabtec’s president and chief executive officer. After the merger is completed, GE Transportation President and CEO Rafael Santana will become president and CEO of Wabtec’s freight segment, while Wabtec Chief Operating Officer Stephane Rambaud-Measson will become president and CEO of Wabtec’s transit segment.

“Wabtec and GE Transportation are global industry leaders and we believe that together we have a unique opportunity to drive tremendous growth in 2019 and beyond as the industry continues to improve,” said Betler.

“Together, we can expand our global reach, strengthen our market capabilities and lead digital innovation across the transportation industry,” said Santana. “We are seeing growth in rail traffic and recent promising orders for new and modernized locomotives from North American Class I, short lines and international railroads, and are confident in the compelling long-term opportunities and synergies before us.”

Wabtec’s corporate headquarters will remain in Wilmerding, Pennsylvania. Wabtec’s freight segment will be based in Chicago, while its transit segment will remain in Paris.

GE will designate for nomination three independent board members.

“I think that’s a good thing,” Lance Fritz, Chief Executive of Union Pacific Corp., said in an interview Wednesday. “Because it’s important that GE continues to participate in the marketplace.”

“Once GE indicated they didn’t want to own GE Transportation anymore, what we cared about is, we need you to find a home that’s stable, that’s going to be around for a while,” Mr. Fritz said. “And Wabtec is going to provide that. Wabtec’s been in the industry a long time, they understand it, they’re committed to it.”

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