GE Explores Exiting From the Railroad Business -- Update

By Thomas Gryta and Dana Cimilluca Features Dow Jones Newswires

General Electric Co. is looking to exit from the railroad business, one of its oldest, as new Chief Executive John Flannery seeks to streamline the conglomerate.

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The Boston-based company is exploring options for the GE Transportation division, according to people familiar with the matter, as a major part of Mr. Flannery's plans to divest more than $20 billion worth of assets in the next two years.

The company, the people said, is looking to partner, spin off or possibly sell the operations, which primarily produce diesel-powered locomotives and railroad equipment. An outright sale could trigger a big tax hit since GE has owned the business for a century and it is valued so low on its books, one person said.

Although GE is one of the world's biggest makers of freight locomotives, the business is cyclical and has been suffering lately from slack demand. In the first nine months of 2017, the unit's revenue slipped 8% and profits fell 15%. The division accounted for $4.7 billion of GE's total revenue of $123.7 billion last year.

It isn't clear what the transportation business may be worth or what other units GE is looking to jettison. The down cycle for the rail industry is a key factor in determining the best way to get out of it, the people said. A GE spokeswoman declined to comment.

GE is also seeking a buyer for part or all of its healthcare information-technology business, known as Centricity, people familiar with the matter said. It is unclear how much the unit is worth, but it could be in the billions of dollars.

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The company has many strong divisions, Mr. Flannery said Friday on a conference call, but also "a number of other businesses which drain investment and management resources without the prospects for a substantial reward."

GE's diesel locomotives are primarily assembled in Fort Worth, Texas, and western Pennsylvania. The division had about 10,000 employees at the start of the year, 2,000 fewer than the prior year. In July, GE said it would stop locomotive production at a plant in Erie, Pa., and shift the work to Fort Worth.

The division was until recently led by Jamie Miller, who will become GE's chief financial officer on Nov. 1. Rafael Santana, chief executive of GE Latin America, was named to take over the unit. In addition to locomotives, the division produces mining equipment and marine motors.

GE mainly produces freight locomotives, which sell for millions of dollars apiece. It eclipsed rival Electro-Motive Diesel, now a unit of Caterpillar Inc., as the biggest seller of diesel locomotives in the early 1990s. Rivals like Siemens AG, Alstom SA and Bombardier Inc. mostly compete in the passenger market.

GE's healthcare IT business provides software and other tools for things like medical-records and image management as well as human-resource and payroll services. GE built up the business through a series of acquisitions including its $1.2 billion purchase of IDX Systems Corp. in 2006.

Efforts to shed the businesses come as Mr. Flannery is less than three months into the job but facing pressure from activist Trian Fund Management and other investors to reduce costs as questions swirl around GE's ability to generate enough cash to fund its $8 billion annual dividend.

On Friday, Mr. Flannery slashed 2017 financial projections, blasted the state of the company and assured investors he has identified the problems. He has promised to get rid of underperforming businesses and cut more than $3 billion in annual industrial spending by the end of 2018. He has made several executive changes and recently agreed to give Trian a seat on the board.

GE shares are down about 32% this year, erasing more than $93 billion in market value even as the stock market has surged to record highs. The company plans to unveil its deeper financial plan and strategy at a Nov. 13 meeting. The shares were recently down 17 cents to $21.33.

The transportation unit is one of seven major business lines at the roughly 295,000-person company. But the unit is far smaller in terms of revenue than GE's power, aviation, oil-and-gas and healthcare units. The only division with less revenue is the century-old GE Lighting, which the company is also looking to exit.

Should GE part with the transportation business, it would be the latest in a series of divestitures. Hit hard by the financial crisis and a slump in energy business, former CEO Jeff Immelt moved to exit media and financial businesses to focus on industrial machinery and services.

Last month, GE agreed to sell its industrial-solutions business to Switzerland's ABB Ltd. for $2.6 billion. The unit, which makes electrical equipment for utilities, was started around 130 years ago when Thomas Edison patented the first circuit breaker.

In March, GE struck a deal to sell its water business to France's Suez SA and one of Canada's largest pension funds for around $3.4 billion.

Write to Thomas Gryta at thomas.gryta@wsj.com and Dana Cimilluca at dana.cimilluca@wsj.com

(END) Dow Jones Newswires

October 26, 2017 14:05 ET (18:05 GMT)