GE dismantles GE Capital; plans $90B to investors
General Electric (GE) said today it is selling the bulk of its GE Capital banking business in its latest attempt to simplify the conglomerate and concentrate on the best-performing segments.
GE kicked off the announcement on Thursday with the sale of its real-estate assets — a hodgepodge of factories, commercial loans and apartment complexes — for $26.5 billion. Wells Fargo bank and private equity firm Blackstone bought the bulk of that for $23 billion, the companies said.
GE will take a $16 billion after-tax charge against earnings the first quarter this year as a result, the company said.
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The stock jumped 8.9% to $27.81 a share as Wall Street applauded the move as evidence the company is getting serious about its strategic shift away from financials and back to manufacturing.
"We needed to see that management was serious about exiting this part of the business — leaving behind the old GE and moving forward," said Barbara Noverini, analyst with research firm Morningstar.
Shareholders also welcomed the plan because it will return money to investors. The company's board has already authorized a new buyback program of up to $50 billion, and GE said it will return as much as $90 billion to investors in the form of buybacks and dividends by 2018.
On Friday, GE Chairman and CEO Jeff Immelt announced plans to whittle down of GE Capital — a legacy of GE's former and sometimes controversial CEO Jack Welch — in a letter to shareholders. It's "a big change for GE," but he said it is "right for the company."
"Creating a simpler GE will position us to deliver superior outcomes around our core capabilities," Immelt said in a letter to shareholders.
Welch also said he supports the plan, calling it "a smart move and right for the changing financial landscape," according to an emailed statement.
The conglomerate, valued at $259 billion, has been slowly selling off its media, financial and appliances assets and doubling down on its industrial manufacturing business in an effort to simplify and boost the stock price, which is down 16% since 2000, the year Immelt took charge from Welch.
GE, which was founded by Thomas Alva Edison in 1876, sold news and entertainment company NBCUniversal in 2011, for example. And last year, GE Capital spun off its private label credit card company, Synchrony Financial, in an initial public offering that raised $2.9 billion.
The financial side of the business has been weighing on the stock due to risks in the business exposed during the financial crisis, as well as the greater regulatory burden it has carried since the mortgage meltdown.
As part of the exit, GE will seek to get rid of GE Capital's designation as a Systemically Important Financial Institution (SIFI), a title that places it under enhanced government scrutiny.
In addition to real estate, GE will also sell the bulk of its commercial lending business, its leasing segment and all consumer platforms, including all U.S. and international banking assets.
The new GE will focus on energy manufacturing, including deep-water oil-drilling equipment; power-generation and water technologies, and its aviation business, which makes military and commercial engines, the company said.
GE will also retain its health care business, including data management.
GE will retain some financing capabilities, such as its aircraft-leasing operations and lending to energy and health care customers. The company currently provides financing for more than 3,000 GE health care customers, including equipment financing.
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"GE Capital has solid businesses and a great team," Immelt said. "However, the business model for large, wholesale-funded financial companies has changed, making it increasingly difficult to generate acceptable returns going forward."
Under the plan, Immelt said that GE expects more than 90% of its earnings will be generated by its industrial businesses by 2018, up from 58% in 2014.
Those businesses offer higher returns, he said.
GE Capital, meanwhile, will make up 10% of the company's revenues by 2018, down from 46% in 2001.
Analysts said the move could help boost the stock back up to where it was in 2000, when it traded as high as $60 a share.
"There's a good possibility they will reach those highs. It's only a matter of time now," said Noverini.
"We should start seeing the shares react more like an industrial stock," which means it will trade at a higher multiple going forward, she said.