By Ted Mann And Kris Hudson
If General Electric Co. sells its appliance business to rival
Electrolux AB, will home builders and property managers have to pay
more for stove tops? The Justice Department says they will, but
home builders aren't as sure.
Bill Justus, vice president of supply chain for David Weekley
Homes, the country's largest private builder, said that while
consumers generally suffer when competition narrows, this situation
is different.
"Since Electrolux has a very small share of the builder channel
business, their acquisition of GE Appliances does very little to
affect overall competition," Mr. Justus said.
Co-Chief Executive Dale Francescon of Denver-based builder
Century Communities agrees, saying that only GE and Whirlpool
compete for his business while Electrolux is "somewhat of a
nonissue."
"Whether GE or Electrolux owns the current GE appliance business
isn't something that creates much concern for us at all," said Mr.
Francescon.
Those views contrast with the Justice Department's take on the
$4 billion U.S. market for stove tops and ovens. In its suit to
block the $3.3 billion sale, the government argues that having
three sizable competitors allows builders to pit them against each
another to drive lower prices.
If the acquisition were to go ahead, the government says a
duopoly would be created that would lead to higher prices--first to
such commercial customers as home builders, property managers and
the government, and later to retail customers.
According to the government, citing industry data, GE is the
second largest seller of ranges and ovens in the U.S. with roughly
28% market share by value, after leader Whirlpool and well ahead of
third-place Electrolux. The three companies, it says, account for
more than 90% of the annual sales of such major cooking appliances
as ranges, wall-mounted ovens and cooktops.
Some builders agree with the government's position that fewer
options will erode their negotiating power. "Competition always
benefits the consumer," said Kira Sterling, chief marketing officer
at Toll Brothers Inc., a $3.9 billion publicly traded builder.
"Consolidation limits competition."
Antitrust expert Erik Gordon, an assistant professor at the
University of Michigan's Ross School of Business, warns that
reducing the number of major competitors in any market from three
to two triggers a more substantial change than when there are three
or more rivals in a market.
"When you go from three to two, the nature of competition
changes qualitatively," Mr. Gordon said. With only two dominant
competitors, companies are less likely to aggressively battle on
pricing, leaving customers with fewer options, he said.
The regulatory headwinds for the deal came as a surprise to
many. When reporting its quarterly earnings in April, Electrolux
said the deal was on track for completion this year, and it
increased its estimate for cost synergies by another $50
million.
The sale is a key part of GE's strategy to focus on high-tech
infrastructure operations. The company had been trying to unload
its appliance operation for years. And finally, with an improving
U.S. economy and strengthening home sales, it found an interested
buyer in Electrolux last fall.
The Swedish company wants to expand in North America, where it
is not only third in the market but also feeling the heat from such
newer entrants as Samsung Electronics Inc. North America accounted
for roughly a third of Electrolux's global sales last year and
adding the GE business would vault it into the No. 2 spot in the
U.S.
Despite the regulatory objection, Electrolux is standing firm,
saying it will vigorously defend the deal. Electrolux CEO Keith
McLoughlin said he would fight for the deal to go through, without
any major divestitures of divisions, including stove tops. "The
transaction from a GE standpoint and from our standpoint is it's
the appliance business or not, " Mr. McLoughlin said Thursday.
Now the company may have to persuade a court that swallowing a
bigger rival won't unfairly tilt the power in stove tops sales
toward the manufacturers.
Joe Sims, an attorney at Jones Day representing Electrolux,
notes that Whirlpool's 2006 purchase of Maytag didn't lead to price
increases. He also says federal authorities have understated the
power wielded by commercial customers. "The retailers and the
builders are plenty capable of taking care of themselves here," Mr.
Sims said.
Meanwhile, builders sound sanguine about the possible
combination.
Pat Hamill, CEO of Denver-based Oakwood Homes, said that roughly
90% of 1,200 homes he plans to build this year will be equipped
with GE appliances. After talking with GE sales representatives, he
believes that Whirlpool and its KitchenAid brand is enough to keep
them in check
"They know that if they slip up a little bit,
Whirlpool-KitchenAid is on their heels," he said.
Write to Ted Mann at ted.mann@wsj.com and Kris Hudson at
kris.hudson@wsj.com
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