General Electric Co. (NYSE: GE) announced Monday morning that Westinghouse Air Brake Technologies Corp.(NYSE: WAB), also known as Wabtec, has agreed to combine with GE’s Transportation division in a deal to create a new company that will make and sell rail equipment, software and services. GE will receive $2.9 billion in cash when the deal closes, now expected to occur early next year.

The value of the deal based on Wabtec’s closing price as of April 19, the last trading day when the stock price was unaffected by reports of a possible transaction, is $11.1 billion. Adjusted for a net tax step-up of $1.1 billion, the transaction value is $10 billion and is expected to be tax-free to both companies’ shareholders.

According to the announcement, Wabtec and GE Transportation will be combined into a wholly owned subsidiary of Wabtec. GE will retain 9.9% ownership of the new company, while Wabtec shareholders will own 49.9% and GE shareholders will own 40.2%.

This is John Flannery’s biggest deal so far in his brief tenure as GE CEO and it was quite cleverly done. GE gets $2.9 billion in cash plus a stake in any upside in the combined company’s future and the addition of $11 billion to Flannery’s promised shedding of $20 billion in low-performing assets.

In April, GE sold off its health care IT business for $1 billion, after shedding its overseas lighting and industrial solutions businesses. The sale of the industrial solutions business to ABB fetched $2.6 billion in cash. No sale price was announced for the lighting business.

Wabtec Executive Chair Albert J. Neupaver will retain his position, as will Wabtec CEO Raymond T. Betler. Once the transaction is completed, Stephane Rambaud-Measson will become president and CEO of Wabtec’s Transit Segment and Rafael Santana will become president and CEO of Wabtec’s Freight Segment. Santana is currently president and CEO of GE Transportation.

GE stock traded up about 2.7% in Monday’s premarket session, at $15.37 in a 52-week range of $12.73 to $29.47. The stock’s 12-month price target is $17.40.

Wabtec shares traded up about 2.3% to $97.35, in a 52-week range of $69.20 to $95.54. The price target on Wabtec stock is $93.36.

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