General Electric (GE) continues to make moves to reduce its dependence on GE Capital, the company’s financial segment. The firm signed an agreement March 15 with global investment firms Värde Partners and KKR, along with Deutsche Bank (DB) to sell GE Capital’s Australia and New Zealand Consumer Lending Business at a value of A$8.2 billion. The division of GE provides personal loans, credit cards, and retail finance services and has a solid customer base in both personal and retail finance in Australia and New Zealand.
Though we have no issues with GE Capital’s financial position (the company’s Tier I capital ratio stood at a healthy 12.7% at the end of 2014), management will continue to scale back the division to further connect with its strengths as a global industrial leader. Consistent with its plans to shrink the unit, GE Capital’s earnings fell ~12% in 2014, and there was a substantial decline in the dividend returned by the segment. Current economic returns at GE Capital are below GE’s cost of capital, backing the decision to alter its earnings ratio.
GE’s current strategy is to shift its portfolio mix to 75% industrial technology and 25% financial services by 2016. This plan is a reaction to falling investor confidence in GE Capital since the Financial Crisis of the late 2000s. The firm is not looking to completely abandon GE Capital, however. Instead, management hopes to build a smaller, more-focused financial unit, staying true to GE’s industrial core. In 2014, GE reported that 42% of its operating earnings came from GE Capital, with the balance coming from its industrial segment.
The deal “down under” is not the first of GE’s moves to achieve its portfolio goals. 2014 was a pivotal year for the company as it took important steps toward completing its plan. GE looks to close a number of deals in 2015 that it initialized last year, including an agreement to acquire the power and grid businesses of French firm Alstom. The deal will increase GE’s global capability by providing a significant addition to its pre-existing power base, as well as add talent and complementary technology from Alstom. These additions will further strengthen the power and water unit, a core division of GE, improving on one of its fastest-growing and most-profitable segments.
In late summer 2014, the company ‘split-off’ GE Capital Retail Finance, now named Synchrony Financial (SYF), via an IPO. Synchrony is currently valued by the market at ~$26 billion, of which GE still owns 85%. By the end of 2015, GE plans to exchange its Synchrony shares to GE shareholders that elect to do so for ~8% of the GE shares outstanding via a tax-free split-off distribution. In the event GE cannot do so, the firm may simply sell its remaining interest in the Synchrony Financial shares. Also last year, GE formed an agreement to sell its appliance business to Sweden’s Electolux for $3.3 billion. This move, along with the IPO of Synchrony, shows management’s dedication to long-term redeployment of capital from non-core assets to higher-growth, higher-margin businesses such as energy, power, and aviation.
Another boost to GE’s industrial segment came earlier this month when the firm announced it had signed a deal with Egypt to supply ~2.7 gigawatts of power by summer 2015. The agreement was signed in December 2014, and GE immediately began work on the project, hoping to go from signing to service in five months. Forty six gas turbines will be supplied and be up-and-running as soon as May 2015, a significant number when considering GE shipped 108 gas turbines in all of 2014. The industry leader already provides over 9.5 gigawatts of electricity in Egypt, and the company expects demand for power in the country to nearly double by 2025, making GE’s partnership in the Egyptian Power Boost Program a promising endeavor.
GE’s focus on transitioning to a smaller financial entity with deeper connections to its industrial roots should prove to be worthwhile. Weakened returns from GE Capital, lack of investor confidence in the company’s financial unit, and falling crude oil prices have weakened the company’s stock-market return during the past year or so, but this will change, in our view. Management continues to remove areas of stagnancy and allocate capital to core growth segments. GE remains a core holding in both newsletter portfolios.