By Thomas Gryta
This article is being republished as part of our daily
reproduction of WSJ.com articles that also appeared in the U.S.
print edition of The Wall Street Journal (January 18, 2018).
General Electric Co. was born from a merger of electric
companies 125 years ago -- and may not be so easy to dismantle.
The industrial giant said it was examining spinning off its
biggest businesses as its looks to solve its financial struggles
and simplify its sprawling structure. While GE's core Aviation,
Power and Healthcare divisions would be among the biggest players
in their markets, separating them would require unraveling
intertwined operations, pensions and debts.
Analysts and investors are crunching the numbers around whether
a breakup would make the parts more valuable than the whole. The
stock fell 4% on Tuesday to $17.48, leaving GE with a market value
around $150 billion. For others, the short-term math is less
important than shedding years of underperformance.
"Investors don't want conglomerates anymore and the other
conglomerates are breaking up," said Scott Davis, analyst with
Melius Research. Mr. Davis contends that a management team has to
earn the right to keep disparate assets together by demonstrating
that shareholders will benefit, something GE hasn't shown.
"The odds of them doing worse is pretty low," he said.
But a wholesale split may include "dis-synergies," the extra
expenses of operating as a separate company that would hurt profit
margins. Those can include corporate expenses, taxes and spending
on research and development.
Even without such costs, analyst Jeffrey Sprague at Vertical
Research Partners calculates that the parts of GE would only add up
to $17 or $18 a share, using valuation multiples from peers in the
respective sectors.
"Managing GE's numerous liabilities also becomes more difficult
the smaller the company becomes," Mr. Sprague wrote in a note to
clients. Rather than splinter into pieces, he said GE is more
likely to sell its stake in oil & gas company Baker Hughes and
possibly spin off part of its aircraft-leasing business.
In recent decades, GE has shed many businesses, including
NBCUniversal, home appliances, plastics and much of its
financial-services arm. Still, any breakup would be massive. With
nearly $125 billion in 2016 revenue, it has more than $130 billion
in debt and its pension is underfunded by more than $30
billion.
The first steps toward a split -- likely to result in a smaller
company and not the end of GE -- are likely by spring, said one
person close to the decision making. Multiple people familiar with
the matter warned that GE's pensions and debt structure could make
separating the divisions difficult, but that such problems can be
solved.
Aside from the known issues with GE, there is concern that more
problems could arise. Despite years of winding down its
financial-services operations, GE Capital has $140 billion in
assets and still ranks as a top 20 bank in the U.S., JPMorgan
analyst Steven Tusa notes.
Cowen analyst Gautam Khanna shares that concern, highlighting
that GE Capital "has sold over $100 billion of assets in recent
years, with limited disclosure on specific liabilities retained."
GE Capital also replaced its president in recent weeks.
Mr. Khanna also says a breakup would make GE less valuable,
putting a sum-of-the-parts value at $11 to $15, partly because he
subtracts value for debt-like items including the underfunded
pensions and GE Capital's net debt.
"We see no economic argument for a full-scale break-up of the
company, and thus no quick fix for the stock," Mr. Khanna said late
last year.
Deutsche Bank analyst John Inch contends that a breakup isn't
feasible, citing GE's pledge to back GE Capital's almost $100
billion in debt, the pension obligations, taxes, and the
possibility of future unknown liabilities.
Mr. Inch also said GE's cash needs make such a separation
difficult. While Aviation and Healthcare generate cash, the Power
business will need "substantial cash" to restructure itself, he
said.
"Notions of GE breaking up ultimately carry low probability and
serve as a deflection from GE's significant underlying problems,"
he said.
Mr. Davis of Melius Research said he doesn't think the process
would be complicated as the liabilities could be assigned to the
spin offs. The pension would get allocated according to the
percentage of employees spun off and debt could be put into the
units as well.
Mr. Davis believes the separate businesses would perform well as
GE is typically amid the top three companies in any given sector
where it has a presence.
For example, its Aviation division is one of the three global
makers of commercial jet engines with $26.3 billion of revenue in
2016. Its struggling Power business, which had 2016 revenue of
$26.8 billion, primarily competes with Siemens AG and Mitsubishi
Heavy Industries Ltd. Its aircraft-leasing unit, GE Capital
Aviation Services, or GECAS, is now the largest piece of GE Capital
and is the world's largest jet lessor with more than 1,000
aircraft.
Rivals also are paring back. Siemens has been outspoken about
the conglomerate model being outdated. The German industrial giant
already has spun off its lighting business and is preparing an IPO
for its health-care unit, which competes with GE Healthcare selling
MRI machines and hospital equipment. Honeywell International Inc.
plans to spin off two of its smaller divisions.
GE CEO John Flannery said the company was evaluating the best
"structure or structures" for its collection of businesses. "The
real core approach here is to make sure that these businesses can
flourish in the decades ahead and that they have the right capital
structures and investment resources to do that," Mr. Flannery told
analysts on Tuesday.
He pointed to the spinoff of GE's credit-card business into
Synchrony Financial and the merger of the GE Oil & Gas division
into separately traded Baker Hughes as examples of moves that could
work for Aviation, Power and Healthcare. GE is now exploring a sale
of its majority stake in Baker Hughes.
Write to Thomas Gryta at thomas.gryta@wsj.com
Corrections & Amplifications Gautam Khanna is an analyst at
Cowen. An earlier version of this article misspelled the name of
the firm.
(END) Dow Jones Newswires
January 18, 2018 02:47 ET (07:47 GMT)
Copyright (c) 2018 Dow Jones & Company, Inc.
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