GE, a pioneering industrial conglomerate, will separate

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Nov. 9 (Reuters) – General Electric Co (GE.N) to split into three state-owned companies as the legendary U.S. industrial conglomerate seeks to streamline operations, reduce debt and revive a battered share price, a the company announced on Tuesday.

The split marks the end of the 129-year-old conglomerate that was once America’s most valuable company and a global symbol of American trading power.

Shares of GE closed 2.6% higher at $ 111.29 on Tuesday, after hitting an almost 3.5-year high, against a 0.35% drop in the broader S&P 500 index ( .SPX). Shares of the industrial conglomerate have gained around 9% since July 30, when the company reduced the number of its traded shares.

The Boston-based company said the three companies would focus on energy, health and aviation.

GE will separate the healthcare company, in which it plans to retain a 19.9% ​​stake, in early 2023. It will combine GE Renewable Energy, GE Power and GE Digital and sell the company in early 2024.

After the split, it will become an aviation company, headed by GE CEO Larry Culp. The airline will inherit GE’s other assets and liabilities, including its trickle-down insurance business.

A spokesperson for the company said the brands and names of the derivative units would be decided at a later date.

It’s Culp’s most daring attempt, who took over GE in 2018, to simplify the company’s operations.

Over the past three years, Culp has focused on reducing debt by selling assets and improving cash flow by streamlining operations and reducing overheads.

The measures led to an improvement in GE’s balance sheet, putting it on track to reduce debt of more than $ 75 billion by the end of 2021.

The company now plans to generate more than $ 7 billion in free cash flow in 2023 and plans to monetize its stakes in Baker Hughes, AerCap and the healthcare unit to reduce its net debt to less than $ 35 billion by then.

In an interview with Reuters, Culp said the decision to split the company was driven by GE’s progress in improving its balance sheet and operational performance.

He didn’t expect the spin-off to face any regulatory or labor issues and said there was no pressure from investors behind the move.

A General Electric employee inspects a jet engine at the GE Aviation Peebles Test Operations Facility in Peebles, Ohio on November 15, 2013. Photo taken November 15, 2013. REUTERS / Matt Sullivan

“The spins create a lot of value,” he said in the interview. “These are measures to make GE stronger, to help our businesses and our teams perform better.”

INDUSTRIAL PLANT

Culp’s strategy stands in stark contrast to the path GE followed in the 1980s and 1990s under Jack Welch, which turned the company into an industrial giant.

A founding member of the Dow Jones Industrial Average (.DJI) in 1896, GE spent more than a century in this historic stock index before securing the start in 2018 after years of sliding valuation. It created the first electric stove and washing machine, the first nuclear power plant, and supplied the US space program. His interests range from television, film and insurance to light bulbs and locomotives.

However, it faces investor skepticism as to its ability to turn a corner since the 2008 financial crisis, while battling debt. The collapse of fortunes prompted the company to fire chief executive John Flannery and hand the reins over to Culp.

For a graphic, see https://tmsnrt.rs/30eqk2r.

The company’s revenue for 2020 was $ 79.62 billion, a far cry from the $ 180 billion and more revenue it recorded in 2008.

In 2015, activist investor Nelson Peltz took a stake in GE and demanded changes in the company, including moving away from financial operations and focusing on its industrial roots. On Tuesday, Peltz’s company, Trian, said it “enthusiastically supports this important step in GE’s transformation.”

GE’s aviation business, generally its cash cow, manufactures jet engines for Boeing Co (BN) and Airbus SE (AIR.PA). Questions remain as to how the company will finance the operations of the unit, which tend to be very capital intensive.

The company believes that the low cost structure of the aviation unit, strong order book and quality track record would enable it to tap into the capital markets. But some analysts believe the unit’s valuation could suffer as it will also take over GE’s financial debts after the split.

“There is clearly a debate among investors as to how much the aviation valuation should be penalized relative to peers because of financial liabilities,” Barclays analysts wrote in a note.

An industry source, however, said the aviation industry has so far been distracted by supporting the rest of the business, which takes up a large chunk of the unit’s bandwidth. The unit is expected to be valued at more than $ 100 billion after the spinoff, the source added.

Culp also said the split would make the various units “more focused” and bring “greater accountability”.

The company expects to take a one-time charge of $ 2 billion related to separation and operating costs and tax costs of less than $ 500 million.

Reporting by Rajesh Kumar Singh in Chicago and Abhijith Ganapavaram in Bengaluru Additional reporting by Tim Hepher in Paris Writing by Sweta Singh and Rajesh Kumar Singh Editing by Anil D’Silva, Nick Zieminski and Matthew Lewis

Our Standards: Thomson Reuters Trust Principles.

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