GE [NYSE:GE] today announced that it will create a simpler, more
valuable company by reducing the size of its financial businesses
through the sale of most GE Capital assets and by focusing on continued
investment and growth in its world-class industrial businesses.
GE and its Board of Directors have determined that market conditions are
favorable to pursue disposition of most GE Capital assets over the next
24 months except the financing “verticals” that relate to GE’s
industrial businesses. Under the plan, the GE Capital businesses that
will remain with GE will account for about $90 billion in ending net
investments (ENI) excluding liquidity – about $40 billion in the U.S. –
with expected returns in excess of their cost of capital.
“This is a major step in our strategy to focus GE around its competitive
advantages,” GE Chairman and CEO Jeff Immelt said. “GE today is a
premier industrial and technology company with businesses in essential
infrastructure industries. These businesses are leaders in technology,
the Industrial Internet and advanced manufacturing. They are
well-positioned in growth markets and are delivering superior customer
outcomes, while achieving higher margins. They will be paired with a
smaller GE Capital, whose businesses are aligned with GE’s industrial
growth.”
“The successful IPO of GE’s retail finance business, Synchrony
Financial, and other recent business exits have demonstrated that our
financial services assets can be more valuable to others,” said GE
Capital Chairman and CEO Keith Sherin. “GE Capital’s businesses are
excellent, and this is a great market for selling financial assets. Our
people are world-class. We are confident these businesses will thrive
elsewhere.”
As part of the execution of this new plan, GE announced today an
agreement to sell the bulk of the assets of GE Capital Real Estate to
funds managed by Blackstone. Wells Fargo will acquire a portion of the
performing loans at closing. The Company also has letters of intent with
other buyers for an additional $4 billion of commercial real estate
assets. In total, these transactions are valued at approximately $26.5
billion.
Under the plan, GE expects that by 2018 more than 90 percent of its
earnings will be generated by its high-return industrial businesses, up
from 58% in 2014.
In 2015, GE’s industrial businesses remain on track for operating
earnings per share of $1.10-$1.20, up solid double digits, in line with
expectations. “With sustainable growth, investments in competitive
advantage, productivity programs and the addition of Alstom, we expect
this performance to continue in the future,” Immelt said. “We will focus
our efforts on these businesses.”
Immelt added, “We are completing another definitive and important move
to reshape GE for the future. GE is a fast-growth, high-tech industrial
company, built on the capabilities of the GE Store. The team is
executing a detailed plan to boost margins and returns. We are
allocating capital to grow the Company and benefit investors. Our best
days are ahead.”
Creating Value in GE Capital
GE Capital has been an important part of the history of GE. However, the
business model for large, wholesale-funded financial companies has
changed, making it increasingly difficult to generate acceptable returns
going forward.
GE will retain its “vertical” financing businesses – GE Capital Aviation
Services, Energy Financial Services and Healthcare Equipment Finance –
that directly relate to its core industrial businesses. The assets
targeted for disposition, in addition to Real Estate, are most of the
Commercial Lending and Leasing segment, and all Consumer platforms,
including all U.S. and international banking assets.
These businesses represent roughly $200 billion in ENI. Since 2008, GE
has reduced GE Capital’s ENI from $538 billion to $363 billion at the
end of 2014. The separation of Synchrony Financial, which is targeted by
the end of 2015, and other recently announced dispositions, account for
another $75 billion in ENI reduction (the Synchrony separation is
subject to regulatory approval).
There is potential to return more than $90 billion to investors in
dividends, buyback and the Synchrony exchange through 2018. The exits of
the targeted GE Capital businesses should release approximately $35
billion in dividends to GE (subject to regulatory approval), which,
under GE’s base plan, are expected to be allocated to buyback; this is
in addition to the impact of the Synchrony exchange and ongoing
dividends. The GE Board has authorized a new repurchase program of up to
$50 billion in common stock, excluding the Synchrony exchange. GE
expects to reduce its share count to 8-8.5 billion by 2018. These
actions would still allow room for opportunistic “bolt on” acquisitions
in GE’s core markets. GE also said it plans to maintain its dividend at
the current level in 2016 and grow it thereafter.
Working with Regulators
GE has discussed this plan, aspects of which are subject to regulatory
review and approval, with its regulators and staff of the Financial
Stability Oversight Council (FSOC). GE will work closely with these
bodies to take the actions necessary to de-designate GE Capital as a
Systemically Important Financial Institution (SIFI). “We have a
constructive relationship with our regulators and will continue to work
with them as we go through this process,” Immelt said.
Financial Details
Approximately $16 billion of after-tax charges are expected to be
recorded in the first quarter of 2015 in connection with the plan – of
which about $12 billion are non-cash. The charges include taxes on
repatriated earnings, asset impairments due to shortened hold periods,
and charges on businesses held for sale, including goodwill allocation.
GE expects that the earnings impact of the GE Capital exits will be
offset by the buyback over the exit period.
GE will execute this strategy using an efficient approach for exiting
non-vertical assets that works for GE and for GE Capital Corporation
(GECC) debtholders and GE shareholders. An element of this approach
involves a merger of GECC into GE and the creation of a new intermediate
holding company for GECC businesses.
GE has amended its income maintenance agreement to guarantee all
tradable senior and subordinated debt securities and all commercial
paper issued or guaranteed by GECC. The guarantee will replace the
current income maintenance covenant. GE will maintain substantial
liquidity and capital through the transition and does not expect to
issue incremental GE Capital long-term debt for at least five years.
Commercial paper will be further reduced to approximately $5 billion by
the end of 2015.
“We are proud of the GE Capital team, the outstanding businesses that GE
Capital employees have built, and how they have delivered for customers
and shareholders over many years,” said Immelt. “The GE Capital team has
displayed great resiliency, facing tough cycles and driving strong
results.”
J.P. Morgan and Centerview Partners have provided financial advice to
GE, and Bank of America provided advisory services. Weil, Gotshal &
Manges, Davis Polk, and Sullivan & Cromwell provided legal advice. For
the Real Estate deal, Bank of America and Kimberlite Advisors provided
financial advice and Hogan Lovells provided legal advice.
GE will discuss this announcement on a webcast at 8:30 a.m. ET today,
available at www.ge.com/investor.
Related charts will be posted on our website for your review prior to
the call.
About GE
GE (NYSE:GE) imagines things others don’t, builds things others can’t
and delivers outcomes that make the world work better. GE brings
together the physical and digital worlds in ways no other company can.
In its labs and factories and on the ground with customers, GE is
inventing the next industrial era to move, power, build and cure the
world. www.ge.com
GE’s Investor Relations website at www.ge.com/investor
and our corporate blog at www.gereports.com,
as well as GE’s Facebook page and Twitter accounts, including
@GE_Reports, contain a significant amount of information about GE,
including financial and other information for investors. GE encourages
investors to visit these websites from time to time, as information is
updated and new information is posted.
Caution Concerning Forward-Looking Statements:
This document contains “forward-looking statements” – that is,
statements related to future, not past, events. In this context,
forward-looking statements often address our expected future business
and financial performance and financial condition, and often contain
words such as “expect,” “anticipate,” “intend,” “plan,” “believe,”
“seek,” “see,” “will,” “would,” or “target.” Forward-looking statements
by their nature address matters that are, to different degrees,
uncertain, such as statements about our announced plan to reduce the
size of our financial services businesses, including expected cash and
non-cash charges associated with this plan; expected income; earnings
per share; revenues; organic growth; margins; cost structure;
restructuring charges; cash flows; return on capital; capital
expenditures, capital allocation or capital structure; dividends; and
the split between Industrial and GE Capital earnings. For us, particular
uncertainties that could cause our actual results to be materially
different than those expressed in our forward-looking statements
include: obtaining (or the timing of obtaining) any required regulatory
reviews or approvals or any other consents or approvals associated with
our announced plan to reduce the size of our financial services
businesses; our ability to complete incremental asset sales as part of
this plan in a timely manner (or at all) and at the prices we have
assumed; changes in law, economic and financial conditions, including
interest and exchange rate volatility, commodity and equity prices and
the value of financial assets, including the impact of these conditions
on our ability to sell or the value of incremental assets to be sold as
part of this plan as well as other aspects of this plan; the impact of
conditions in the financial and credit markets on the availability and
cost of GECC’s funding, and GECC’s exposure to counterparties; the
impact of conditions in the housing market and unemployment rates on the
level of commercial and consumer credit defaults; pending and future
mortgage loan repurchase claims and other litigation claims in
connection with WMC, which may affect our estimates of liability,
including possible loss estimates; our ability to maintain our current
credit rating and the impact on our funding costs and competitive
position if we do not do so; the adequacy of our cash flows and earnings
and other conditions which may affect our ability to pay our quarterly
dividend at the planned level or to repurchase shares at planned levels;
GECC’s ability to pay dividends to GE at the planned level, which may be
affected by GECC’s cash flows and earnings, financial services
regulation and oversight, and other factors; our ability to convert
pre-order commitments/wins into orders; the price we realize on orders
since commitments/wins are stated at list prices; customer actions or
developments such as early aircraft retirements or reduced energy demand
and other factors that may affect the level of demand and financial
performance of the major industries and customers we serve; the
effectiveness of our risk management framework; the impact of regulation
and regulatory, investigative and legal proceedings and legal compliance
risks, including the impact of financial services regulation and
litigation; adverse market conditions, timing of and ability to obtain
required bank regulatory approvals, or other factors relating to us or
Synchrony Financial that could prevent us from completing the Synchrony
Financial split-off as planned; our capital allocation plans, as such
plans may change including with respect to the timing and size of share
repurchases, acquisitions, joint ventures, dispositions and other
strategic actions; our success in completing, including obtaining
regulatory approvals for, announced transactions, such as the proposed
transactions and alliances with Alstom, Appliances and Real Estate, and
our ability to realize anticipated earnings and savings; our success in
integrating acquired businesses and operating joint ventures; the impact
of potential information technology or data security breaches; and the
other factors that are described in “Risk Factors” in our Annual Report
on Form 10-K for the year ended December 31, 2014. These or other
uncertainties may cause our actual future results to be materially
different than those expressed in our forward-looking statements. We
do not undertake to update our forward-looking statements.
Copyright Business Wire 2015