Over the summer, Larry Culp toured some of General Electric’s operations to introduce himself to the company where he had just been appointed lead independent director. After taking over as chief executive last month, he now has to decide which of those businesses he wants to keep.
GE is struggling under its debts — $115bn at the end of September — and Mr Culp has pledged to bring them under control. Last week he told CNBC he was taking on that challenge with a “sense of urgency”, and he underlined that message by selling part of GE’s stake in oilfield services group Baker Hughes to raise about $4bn. On Friday the company also announced the sale of its portfolio of loans and leases for healthcare equipment to TIAA Bank, raising another $1.5bn.
The deals were reminders that, even after all its troubles, GE still has an array of assets that can attract buyers. Over the next year or so, Mr Culp aims to create a smaller but financially healthier version of GE. The question for shareholders is what will be left when that process is over.
GE was built into a sprawling conglomerate by Jack Welch, chief executive from 1981 to 2001, and his three successors — Jeff Immelt, John Flannery, and now Mr Culp — have had to work out how best to dismantle that empire.
Mr Immelt sold the bulk of the financial services operations, but held on to the idea that GE added value to its disparate industrial businesses through shared culture, management techniques, a common research and development effort, and shared software. Mr Flannery turned a sceptical eye on that theory, and in June announced a plan to cut back GE’s corporate centre and focus on just two sectors, electricity and aviation, by selling the Baker Hughes stake and spinning off the healthcare and life sciences division.
Since that strategy was announced, Mr Flannery has been ousted by the board and the pressure on GE has grown. Its shares have fallen by about 40 per cent, and its credit rating has been downgraded by two notches to BBB+.
The company argues that it faces no short-term liquidity problems. It has about $40bn of bank lending facilities in place, and has drawn down just $2bn of them. But Stephen Tusa, an analyst at JPMorgan, published a note earlier this month arguing that the “real bear case” was longer-term: that GE had “$100bn in liabilities and zero enterprise free cash flow, even after cutting its quarterly dividend from 12 cents to just 1 cent.
Mr Culp says he is sticking to the break-up strategy, although in implementing it he is more sharply focused on raising cash, telling CNBC last week that he had “no higher priority right now” than cutting GE’s debts.
The plan for the healthcare and life sciences division reflects that shift. In June GE said it would spin off 80 per cent of the business to its shareholders and sell the remaining 20 per cent. Now Mr Culp says he could sell just under 50 per cent, spinning off the rest to secure beneficial tax treatment. Analysts have suggested the division’s life sciences business could also be split off and sold separately for about $4bn.
The need for cash creates opportunities for private equity investors. Blackstone, Apollo and Brookfield Asset Management are among a group of buyers taking a close looks at GE assets, according to a person close to Mr Culp.
Apart from healthcare, other assets that are up for sale include GE’s remaining holding in Baker Hughes, which will be a little over 50 per cent of the company’s equity following last week’s deal, with a market value of about $13bn.
Mr Culp’s confidant said there had also been several requests for information to acquire the aviation leasing business GECAS, which is one of the world’s largest and accounts for more than half of GE’s financial services revenues. The person suggested Blackstone seemed like the most credible acquirer. Dave Calhoun, Blackstone’s head of private equity portfolio operations, knows GE well: he worked there for 26 years, rising to become vice-chairman under Mr Immelt before leaving in 2006.
Meanwhile Wabtec, the company that is merging with GE’s locomotive and mining equipment division, last week secured approval from its shareholders to go ahead with that deal, which is scheduled to close early next year. That will bring in another $2.9bn in cash for GE, and give it a 9.9 per cent stake in the merged company, which could also be sold.
Put those deals together, and it seems quite possible that GE could raise about $40bn over the next year or so. Whether that will be enough remains to be seen.
Net debt for GE’s industrial businesses is about $38bn, and the deficit in its pension funds is about $17bn, according to Vertical Research Partners. But there are also additional liabilities that could be large, mostly connected to the legacy of the group’s financial services activities. After it revealed in January that it would have to pay an additional $15bn to meet future liabilities on insurance policies that it stopped selling in 2006, investors have been on edge wondering what other unpleasant surprises might be sprung on them.
John Inch, an analyst at Gordon Haskett, has been highlighting the recent rise in spreads for GE’s credit default swaps, a measure of the cost of insuring against the company going bankrupt, as a possible portent of further downgrades in its credit rating. If those materialised, they “could pose significant operational challenges and increased costs”, he warned.
If that threat started to look significant, Mr Culp could dig further into the heart of his planned future GE: power and aviation. The two businesses show the best and the worst of GE’s industrial operations. The power equipment division has world-leading turbine technology, but is tied to the markets for gas and coal power plants that seem to be in long-term decline, and its leaders have compounded its problems by taking an over-optimistic view of the outlook.
Deane Dray, an analyst at RBC Capital Markets, suggested that Mr Culp’s decision to break up the power division into smaller units could mean that some of them would be sold, with Blackstone again named as a possible buyer.
The aviation division, which makes aero-engines and systems, also has world-class technology, but in a market with excellent long-term growth prospects. It accounts for about half of the group’s entire value, according to Vertical Research. Mr Culp suggested separating out the division would be “not high on our list” of plans. “I wouldn’t dismiss anything once and for all. I think that would be foolish. But . . . aviation is our crown jewel,” he told CNBC.
His reluctance to let go of such a prize asset is understandable. Selling businesses brings in quick cash, but also surrenders future earnings. The disposal process is not a magic wand that can open up a hidden store of value. But raising $40bn-plus should at least help reassure investors that the risk of some kind of financial crunch is receding.
“At the end of the process GE will look like a shell of what it used to be, but it will survive,” said Mr Culp’s confidant. “As long as there is a debt pile that risks bring the company down, GE will keep on selling.”