General Electric Co. (GE) is to get rid most of its GE Capital unit to create a “simpler, more valuable company” focused on its core industrial operations, in a landmark decision for both the company — and, perhaps, the economy too.
GE said it will shed over four-fifths of its in-house bank–the seventh-largest in the U.S.–over the next three years, drawing a thick line under the days when it depended on the freewheeling unit’s financial engineering skills to generate half of its profits.
For the most part, it’s going to give the money it gets for those businesses back to shareholders, mainly through a $50 billion share buyback program, the second-biggest in history. The company’s shares, which have badly lagged the S&P 500 over the last couple of years, rocketed over 8% early Friday, closing in on a seven-year high.
However, Moody’s Investor Service downgraded the company’s debt by a notch to A1 from Aa3, saying the “more aggressive” new plans favored equity holders over bondholders.
The buyback is intended, among other things, to soften the blow of a $16 billion charge related to the restructuring. Around $6 billion will go in taxes as the company repatriates earnings from operations around the globe.
GE had already given indications of where it was heading last year as it bought the power engineering operations of French engineering giant Alstom SA (AOMFF) for $15.6 billion, its biggest-ever acquisition. That deal is expected to close in the summer, CEO Jeff Immelt told an analyst call Friday.
Immelt said the company was exploiting a “window of opportunity” to sell while interest rates were still low and the corporate world awash with liquidity.
“We think the market is right and we’re going to go as fast as we can,” Immelt said.
By 2018, the proportion of GE’s earnings coming from the core industrial businesses will have risen to over 90%, from just over 50% last year.
By that time, GE aims to have squeezed $35 billion out GE Capital in the form of dividends to the parent company. It started the process Friday with the sale of $23 billion in real estate assets to The Blackstone Group (BX) and Wells Fargo & Co. (WFC). It said it’s close to selling commercial real estate worth another $4 billion to other investors.
Immelt had warned last month in his letter accompanying the 2014 annual report that he wanted to shrink the business and improve returns there, arguing that finance “must enhance our industrial competitiveness, not detract from it.”
Not many, however, had expected anything quite as radical as this.
GE Capital, which mushroomed in the years leading up to the 2008 crisis, still has assets of nearly $500 billion. At times, the unit seemed to be a living, breathing example of how finance had gained the ascendancy over industry in the modern economy. However, that all changed after 2008, when it became much harder to refinance its huge debt pile.
Larry Bossidy, the former chairman of Honeywell, which was bought by GE under its previous CEO Jack Welch, told CNBC Friday that “the balance sheet became stretched, on both the asset and liability side, and that left them vulnerable to the financial crisis.”
GE Capital had over $100 billion outstanding in short-term commercial paper alone by the end of 2007, and had to resort to facilities backed by the Federal Reserve and FDIC to get through the worst of the crisis (although it avoided using the Treasury’s Troubled Asset Relief Program, or TARP).
All that will be left of GE Capital at the end of three years is its “vertical” financing businesses—GE Capital Aviation Services, Energy Financial Services and Healthcare Equipment Finance–-that directly relate to the company’s core industrial businesses.
The plan will almost certainly ensure that GE Capital no longer has to carry the extra regulatory burden of being a “systemically important financial institution”–a tag it got in 2013 as the administration pushed expensive new capital requirements onto the nation’s most important lenders. Those requirements have played a big part in damping profitability at GE Capital.
GE reckons that , including the full withdrawal from its retail finance business Synchrony, its plans create potential for over $90 billion to be returned to investors through 2018.
It said, however, that it would still have enough money left over for $3 to $5 billion a year of ‘bolt-on’ acquisitions in the core businesses, and a higher dividend from 2017 onwards.
(Roland Jones contributed to this report)