General Electric Company said on Monday it would sell its biopharma business to Danaher Corp. for US$21.4-billion, in the biggest strategy reversal since Lawrence Culp took over as the industrial conglomerate’s chief executive in September.
GE rejected an approach by Danaher for that business a year ago. But its position changed after Mr. Culp was appointed CEO and the GE board became more open to a deal, according to people familiar with the negotiations who requested anonymity to discuss them.
As a result, GE will receive some US$20-billion in net proceeds, which it will use to trim its debt pile, which stood at US$121-billion at the end of December.
Both GE’s and Danaher’s shares jumped on news of the deal, although GE still faces significant hurdles in recovering its former corporate glory. It lost two-thirds of its market value in the past two years amid a series of operational and investment missteps.
Among its challenges are mismanagement of orders and operations in its power business, and dealing with its toxic long-term-care insurance liabilities in its GE Capital arm.
“[The GE-Danaher deal] unfortunately doesn’t solve the real issues, which comes back to power. That’s what took the stock down, and that’s still going to take some time play out,” said Richard Grasfeder, a portfolio manager at Boston Private Wealth LLC, which held about 478,204 shares in GE as of the end of 2018, down from 787,600 shares a year earlier.
Mr. Culp said Monday the sale to Danaher, which he was previously instrumental in revitalizing as CEO from 2001 to 2014, was a pivotal milestone in efforts to turn around GE, a 126-year old conglomerate.
“It demonstrates that we are executing on our strategy by taking thoughtful and deliberate action to reduce leverage and strengthen our balance sheet,” Mr. Culp said in a statement.
The biopharma sale also propelled a broad rally in GE’s roughly US$120-billion of bonds, which had taken a pounding in late 2018 as it became clear that earlier restructuring efforts were falling short and that the company would need to take more aggressive action to address its debt load in particular.
Mr. Culp “has earned his stripes. It is clear that nobody in his job before him – John Flannery or Jeff Immelt – would have probably been able to pull off this transaction with Danaher,” William Blair & Co. analyst Nicholas Heymann said.
“And the price Danaher is paying GE is two times our expectations. This is a home run. It really turns the page now for GE to address liquidity concerns,” Mr. Heymann adds.
Until recently, the company had plans to spin off the entire health-care unit. Mr. Culp, however, said in January that GE would sell nearly half the unit.
Sources familiar with the matter told Reuters on Monday that GE will put the initial public offering of the unit on hold until the deal with Danaher closes, expected in the second half of the year.
This would mean that GE is likely to retain access to the earnings and cash flows of the remaining health-care businesses for a longer period of time, alleviating some cash concerns, even as the power business struggles, said Rene Lipsch, the lead GE analyst at Moody’s.
BOOST FOR DANAHER
The purchase is also the biggest yet for Danaher, which has a history of deal-making, and half of its revenue has come from companies it has acquired in the past seven years.
The deal will expand Danaher’s presence in the biopharma industry, providing it with access to tools for research and development of drugs. Shares of the medical-equipment maker rose more than 9 per cent, to a record US$124.07.
Danaher expects to add between 45 and 50 cents a share to its adjusted profit in the first full-year after the deal closes, and does not expect any “significant” antitrust challenges.
“These are really complementary businesses when you look across the portfolio of the product line on GE biopharma’s side and our side,” Danaher’s CEO Thomas Joyce said on a call with analysts.
The biopharma business accounted for 15 per cent of GE’s health-care business revenue in 2018. It makes instruments and software that support the research and development of drugs.
The sale leaves GE’s health-care unit with its medical-device unit, which makes X-ray, CT scan and MRI machines, and its pharmaceuticals diagnostic unit.
The announcement also further eased concerns about GE’s solvency that had grown markedly last year, reflected in a surge in the price for GE credit default swaps (CDS) during the fourth quarter, a form of insurance against default. On Monday, GE’s CDS prices sank to their lowest since mid-October.
GE, which reported lower-than-expected fourth-quarter profit in January, is expected to provide its 2019 outlook on a call on March 14.