In its concerted effort to reduce credit risks, General Electric Company (GE) is planning to shrink its finance business by 2015 through the divestiture of its North American consumer lending unit. The strategic move is arguably the biggest step in restructuring GE Capital’s portfolio to shield the parent company from intense market volatilities that plagued the market during the 2008-09 financial crisis.
The North American consumer lending business includes credit cards to retail giants like Wal-Mart Stores and J. C. Penney Company. General Electric will sell 20% of this business through an IPO in 2014. The remaining shares of the unit will be distributed to the shareholders of the parent company in a tax-free transaction.
Since the financial crisis, Warren Buffett's Berkshire Hathaway has had significant exposure to financial stocks in its portfolio. Q1 2021 hedge fund letters, conferences and more At the end of March this year, Bank of America accounted for nearly 15% of the conglomerate's vast equity portfolio. Until very recently, Wells Fargo was also a prominent Read More
Post-recession, General Electric has been steadily dismantling its real estate and home loans to strengthen the balance sheet of GE Capital. Ending net investment or ENI (excluding cash and cash equivalents) for GE Capital, a measure of its balance sheet, dropped to $384.6 billion at the end of third quarter 2013 from $556 billion in 2008. With the divesture, General Electric anticipates to reduce it further to around $300 billion.
The new entity will operate as a standalone company valued at about $16 billion to $18 billion, competing with other players in the industry such as Discover Financial Services (DFS), American Express Company (AXP) and Capital One Financial Corp.(COF). The divesture is expected to reduce the total outstanding shares of the company to approximately 9 billion to 9.5 billion from 10.12 billion at present.
Strategic Shift in Balance
With the spin-off, General Electric intends to focus more on its industrial business and expects operating profit to aggregate 65% of the total operating earnings of the company by 2015. The company also expects to record a profit of approximately $1 billion from the divesture of its retail fiancé business.
The gradual rebalancing of GE Capital’s debt portfolio has further reduced credit-default swaps tied to debt to 69.9 bps – the lowest level since Jan 2008. As credit-default swaps typically decline with an improvement in investor confidence, it signifies that GE Capital is more creditworthy to derivative traders at present than it was before. This further offers a lucrative option to exit the market on a high.
The spin-off will realign the corporate strategy of the company to a manufacturing-based entity with emphasis on big-ticket items such as medical equipment and scanners.
General Electric is one of the largest and the most diversified technology and financial services corporations in the world. With products and services ranging from aircraft engines, power generation, water processing, and security technology to medical imaging, business and consumer financing, media content, and industrial products, the company serves over 100 million customers worldwide. Its segments include Power & Water, Oil & Gas, Energy Management, Aviation, Healthcare, Transportation, Home & Business Solutions, and GE Capital.
General Electric currently has a Zacks Rank #3 (Hold).