GE May Sell Some RCA Assets, Analysts Say
Shareholders of RCA are expected to give their formal blessing today to the company’s merger with General Electric amid Wall Street speculation that General Electric may be contemplating a sell-off of some RCA assets.
The shareholders’ vote at a New York hotel will leave only the approval of state and federal regulators for completion of the $6.28-billion deal, which will form the nation’s seventh-largest industrial company.
General Electric officials say no decisions have been made on how the two companies will be joined, but some analysts expect the new General Electric to sell off several units that lie outside what the company considers its core service and high-technology businesses. Some speculate, too, that General Electric might sharply cut the RCA payroll in keeping with the aggressive cost-pruning program that GE has pursued for five years.
Nicholas P. Heymann, a vice president and analyst with Drexel Burnham Lambert in New York, expects GE to sell off part of RCA’s semiconductor unit as well as its consumer electronics, record and video, telephone equipment and carpet manufacturing businesses. The sales could raise $1.6 billion in 18 months, Heymann says.
Competition from the Japanese and others has prevented consumer electronics from becoming a very profitable business for either company. Last year, General Electric’s operating profits came to less than 1% of sales, and GE is expected to take a big charge for the fourth quarter of 1985 to cover the cost of shutting down its television manufacturing and assembling operations, Heymann notes.
Merger of the companies’ consumer electronics units might also raise antitrust objections, since the pair control almost one-quarter of the U.S. television market, for example. The companies’ formal merger agreement says GE is willing to dispose of RCA’s $2.2-billion-a-year consumer electronics business if it becomes necessary to win antitrust approval. The unit makes videocassette recorders and cameras as well as color and black-and-white television sets.
RCA has already declared its willingness to sell Coronet Industries, its tufted carpet manufacturing business, which accounted for about 3% of sales last year.
Heymann believes that RCA’s consumer products, telephone equipment, carpet, and record and video business are good candidates for divestiture because they are among the company’s slowest-growing and least-profitable businesses. As a group, he notes, their operating earnings average 3% of sales, while their combined growth rates average about 2% a year.
Heymann also believes that GE may simultaneously try to sell eight of its own units that do not fit the company’s long-range strategy of reducing its presence in basic manufacturing businesses. Among these are GE’s mobile communications business, its electrical distribution unit and units that make mining and paper-making equipment.
Sales of these businesses could raise another $1.4 billion, he estimates.
The combination stands to particularly strengthen the companies’ defense contracting businesses. The new General Electric will be the fourth-largest defense contractor, with units that together had 1985 government and defense sales of more than $7 billion.
Heymann also expects GE to trim the RCA payroll significantly over the next two years, noting that RCA will initially account for about one-fifth of GE’s assets but one-quarter of its work force.
GE Chairman John F. Welch and others have pledged that GE won’t touch RCA’s highly profitable NBC subsidiary, but some on Wall Street wonder if the network won’t also see some cost cutting, perhaps including work force reductions.
“They’ve been spared the belt-tightening that the other networks have been through, but I think NBC may have to follow the path of competitors, and particularly in news,” said James Magid, analyst with L. F. Rothschild, Unterberg, Towbin.
The analysts don’t expect any snags in the regulatory reviews, which are expected to be completed in the second half of the year. The companies have submitted documents to the Justice Department for antitrust review and say they will apply this month to the Federal Communications Commission for permission to transfer RCA broadcast licenses to General Electric.
However, because of FCC rules limiting ownership of multiple broadcast stations, the company may be forced to sell AM or FM radio stations in Washington, New York or Chicago, the companies have acknowledged.
As an alternative, they might be able to swap RCA stations in those cities with stations in other cities.
The merger also will require approvals from insurance regulators in Illinois and New York and from New Jersey’s environmental protection agency.
