General Electric Co said on Tuesday it will spin off its
healthcare business and divest its stake in oil-services firm Baker Hughes,
effectively breaking up the 126-year-old conglomerate which was once the most
valuable U.S. corporation and a global symbol of American business power.
The slimmed-down company will focus on jet engines, power
plants and renewable energy, which GE hopes will reward battered shareholders
who have seen the stock lose more than half its value over the past 20 years.
“This is really the culmination of 10 years of observations
I’ve had about the company,” said Chief Executive John Flannery, a GE veteran
who took the helm in August with a mandate to revamp the company. Flannery’s
comments came on a conference call with investors and analysts.
GE said its plan will strengthen its balance sheet by
reducing debt, building up cash and further shrinking GE Capital. Shareholders
will receive 80 percent of the value of GE Healthcare as a tax-free
distribution of shares.
GE shares jumped 8.7 percent to $13.86, on track for their
best day in three years.
Effective Tuesday, GE was kicked out of the Dow Jones
industrial average, the iconic stock index of which it was a founding member in
1896.
The company will spin off the profitable healthcare unit
over the next 12 to 18 months, and sell its Baker Hughes stake over two to
three years.
GE will likely either need to hold an initial public
offering of Baker Hughes, organize numerous block trades of shares to
institutional investors, or find an entirely new investor to acquire its
holding since the only two strategic buyers of its stake, Schlumberger NV and
Halliburton Co, would have major antitrust risks in the oilfield services
market, analysts said.
In an interview, Flannery declined to rule out selling
healthcare or the Baker Hughes stake to strategic buyers, but he said the
company intended to have them both trade publicly so GE shareholders benefit
from future growth.
The decision to divest does not mean GE dislikes the
businesses, he said. “It’s quite the opposite. We’re trying to get these out
directly into our shareholders hands and in an environment where they can grow
more quickly.”
GE pledged to preserve its 48-cent-a-year dividend until
the healthcare unit is spun off, partially appeasing investors who have
expressed concerns about the company’s ability to pay it.
The moves, which end a year-long strategic review, mirror
changes that analysts had sought a year ago.
GE said its plan to divest $20 billion in assets “is
substantially complete,” leaving a “simpler and stronger” company that it hopes
will boost growth, operating profits and shareholder returns.
Major shareholder Trian Fund Management supports GE’s plans
and believes that the initiatives will create “substantial value for
shareholders,” it said in a statement.
The remaining businesses “share similar technologies and
industrial markets, in contrast to limited synergies that exist with GE
Healthcare,” Fitch analyst Eric Ause said in a note.
BEST AND WORST
But the changes leave GE with some of its best- and
worst-performing units. Aviation has been highly profitable, but power business
profit has tumbled as sales of plants and services have slowed, and renewable
energy profit margins are less than 5 percent, a result of fierce price
competition.
Flannery said in the interview that he expected gas-powered
electricity generation to keep rising over the next 30 years. But new power
plant sales will be weak “and frankly we’re planning for that as sort of
indefinite,” Flannery said.
“We’re making management actions now premised on we’ve got
to live in that world,” he said. “If it changes, great, but don’t hope.”
The healthcare unit spinoff follows rival Siemens AG’s
floating its medical business as a separate company, Siemens Healthineers, in
March.
On Monday GE said it agreed to sell its distributed power
unit for $3.25 billion to U.S. buyout group Advent. GE also has agreed to shed
its transportation unit, which makes railroad locomotives.
GE bought Baker Hughes in 2017 and combined it with its own
oil-and-gas equipment and services unit to create a new company in which GE
owns 62.5 percent. The unit reported sales of $17.23 billion in 2017.
GE estimated restructuring costs at between $800 million
and $1.2 billion, and said it plans to reduce industrial net debt by about $25
billion by 2020 and maintain more than $15 billion of cash on its balance
sheet.
The company has foundered in key markets in recent years,
and a foray into financial services steered it into the eye of the global
financial crisis in 2008.
GE has since largely divested GE Capital, but lingering
liabilities forced it to take a $6.2 billion charge last year, and begin
setting aside $15 billion more in reserves against insurance claims.
Former GE CEO Jeff Immelt, who ran the company for 16
years, from shortly before the 9/11 attacks to last summer, said in a statement
that important elements of GE’s history would continue after the latest batch
of sales are done.
“GE remains a formidable company,” he said.
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