At 122 years old, General Electric Co. is heading back to the future.
The iconic American conglomerate, under the leadership of long-serving chief executive Jeffrey Immelt, is engaged in a bid to return to its industrial roots and retreat from its near-disastrous plunge into finance.
To speed along that process, GE is reportedly in talks to buy the energy business of French industrial giant Alstom SA for $13-billion (U.S.) that, if completed, would be the company’s largest acquisition to date.
At the same time, GE has announced it will spin off its consumer credit business in North America through an initial public offering later this year. The new company, to be called Synchrony Financial, is expected to fetch a valuation of more than $20-billion.
The moves are part of GE’s recovery from its long affair with finance. For years, the dirty secret of the blue-chip conglomerate’s success was that much of its profit came not from manufacturinig turbines or jet engines or refrigerators, but from making loans.
Even now GE Capital – the company’s once swashbuckling finance arm – accounts for just under half of its profit. Mr. Immelt has pledged to take that proportion down to 30 per cent by 2015.
In a letter to investors last month, he touted the progress that GE had made in shrinking its financial businesses. The company is “the largest and most profitable infrastructure company in the world,” he wrote. Meanwhile, GE Capital is a “smaller and safer specialty finance leader with less leverage and more liquidity.”
Investors are keen to see GE complete its transformation into a global infrastructure giant with a mid-sized finance arm, rather than its prior incarnation, which might be described as a bank that sold industrial equipment. While the company’s stock is up 64 per cent since the start of 2009, the shares of peers such as United Technologies Corp. and Honeywell International Inc. have fared far better over same period.
Mr. Immelt, meanwhile, is looking to his own legacy after steering GE through both the September 11, 2001, attacks and the 2008 financial crisis. Since he took the helm in 2001, GE’s stock remains down more than 30 per cent.
“The overwhelming evidence, in our view, suggests that GE should not be in the banking business” or any other non-core businesses, wrote Scott Davis, an analyst at Barclays, in a report in March. “Investors are still looking for a GE that can be a pure play infrastructure company.”
Under Jack Welch, its previous chief executive, GE dove into a variety of financial activities. Thanks to its perfect credit rating, the company was able to borrow comparatively cheaply and plow the funds into everything from Japanese credit cards to American commercial real estate.
GE Capital was “like a hydra,” said Peter Sorrentino, a senior portfolio manager at Huntington Asset Advisors, which owns GE shares and manages $4-billion in mutual funds. “It had gotten into everything.”
During the 2008 financial crisis, GE Capital threatened to bring down its parent. The prospect was averted, in part, when Warren Buffett made a very public $3-billion investment in GE stock in October of that year. GE lost its coveted triple-A rating from Standard & Poor’s in 2009 (currently its debt is rated just one notch lower).
As the economy recovered, so too did many of GE Capital’s businesses. But both investors and GE’s leadership had lost their taste for the risks – and increasingly heavy regulations – that such operations entailed. For Mr. Immelt, the challenge became how to shrink GE Capital, but not so quickly that it damaged the company’s profit.
Some parts of GE Capital – offering financing to purchase aircraft or health-care equipment, for example – help support its industrial segments and make sense to retain. But Mr. Immelt has made clear that he’s taking a hard look at everything not connected to providing loans for the type of company that constitutes GE’s customers.
“It’s not to say [the rest] aren’t great businesses,” said Steven Winoker, an analyst at Sanford C. Bernstein & Co. “They’ll just be worth more to somebody else and don’t need to be part of this sprawling conglomerate.”
The impending spinoff of GE’s North American consumer credit business is a major step in the process. GE will begin by floating 20 per cent of the unit, which reportedly generates $2-billion in profit.
Meanwhile, GE has launched a bid to buy the Alstom’s power business, according to several reports. The cash for the purchase would come from profit which GE has stashed overseas instead of repatriating it and incurring U.S. taxes. A deal with Alstom has yet to be announced and would face significant obstacles, including political opposition in France. A GE spokesman declined to comment on the reports.
Buying Alstom “makes sense” for GE, said Nicholas Heymann, an analyst at William Blair & Co. Mr. Immelt has said that to justify larger purchases, they must be attractively priced, serve a core strategic purpose and add to earnings. This transaction appears to meet those criteria, said Mr. Heymann. Plus, he added, thanks to long experience in the country, “GE understands France.”