For GE, a Breakup Is No Quick Fix

By Thomas GrytaFeaturesDow Jones Newswires

General Electric Co. was born from a merger of electric companies 125 years ago -- and may not be so easy to dismantle.

The industrial giant said it was examining spinning off its biggest businesses as its looks to solve its financial struggles and simplify its sprawling structure. While GE's core Aviation, Power and Healthcare divisions would be among the biggest players in their markets, separating them would require unraveling intertwined operations, pensions and debts.

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Analysts and investors are crunching the numbers around whether a breakup would make the parts more valuable than the whole. The stock fell 4% on Tuesday to $17.48, leaving GE with a market value around $150 billion. For others, the short-term math is less important than shedding years of underperformance.

"Investors don't want conglomerates anymore and the other conglomerates are breaking up," said Scott Davis, analyst with Melius Research. Mr. Davis contends that a management team has to earn the right to keep disparate assets together by demonstrating that shareholders will benefit, something GE hasn't shown.

"The odds of them doing worse is pretty low," he said.

But a wholesale split may include "dis-synergies," the extra expenses of operating as a separate company that would hurt profit margins. Those can include corporate expenses, taxes and spending on research and development.

Even without such costs, analyst Jeffrey Sprague at Vertical Research Partners calculates that the parts of GE would only add up to $17 or $18 a share, using valuation multiples from peers in the respective sectors.

"Managing GE's numerous liabilities also becomes more difficult the smaller the company becomes," Mr. Sprague wrote in a note to clients. Rather than splinter into pieces, he said GE is more likely to sell its stake in oil & gas company Baker Hughes and possibly spin off part of its aircraft-leasing business.

In recent decades, GE has shed many businesses, including NBCUniversal, home appliances, plastics and much of its financial-services arm. Still, any breakup would be massive. With nearly $125 billion in 2016 revenue, it has more than $130 billion in debt and its pension is underfunded by more than $30 billion.

The first steps toward a split -- likely to result in a smaller company and not the end of GE -- are likely by spring, said one person close to the decision making. Multiple people familiar with the matter warned that GE's pensions and debt structure could make separating the divisions difficult, but that such problems can be solved.

Aside from the known issues with GE, there is concern that more problems could arise. Despite years of winding down its financial-services operations, GE Capital has $140 billion in assets and still ranks as a top 20 bank in the U.S., JPMorgan analyst Steven Tusa notes.

Cowan analyst Gautam Khanna shares that concern, highlighting that GE Capital "has sold over $100 billion of assets in recent years, with limited disclosure on specific liabilities retained." GE Capital also replaced its president in recent weeks.

Mr. Khanna also says a breakup would make GE less valuable, putting a sum-of-the-parts value at $11 to $15, partly because he subtracts value for debt-like items including the underfunded pensions and GE Capital's net debt.

"We see no economic argument for a full-scale break-up of the company, and thus no quick fix for the stock," Mr. Khanna said late last year.

Mr. Davis of Melius Research said he doesn't think the process would be complicated as the liabilities could be assigned to the spin offs. The pension would get allocated according to the percentage of employees spun off and debt could be put into the units as well.

Mr. Davis believes the separate businesses would perform well as GE is typically amid the top three companies in any given sector where it has a presence.

For example, its Aviation division is one of the three global makers of commercial jet engines with $26.3 billion of revenue in 2016. Its struggling Power business, which had 2016 revenue of $26.8 billion, primarily competes with Siemens AG and Mitsubishi Heavy Industries Ltd. Its aircraft-leasing unit, GE Capital Aviation Services, or GECAS, is now the largest piece of GE Capital and is the world's largest jet lessor with more than 1,000 aircraft.

Rivals also are paring back. Siemens has been outspoken about the conglomerate model being outdated. The German industrial giant already has spun off its lighting business and is preparing an IPO for its health-care unit, which competes with GE Healthcare selling MRI machines and hospital equipment. Honeywell International Inc. plans to spin off two of its smaller divisions.

GE CEO John Flannery said the company was evaluating the best "structure or structures" for its collection of businesses. "The real core approach here is to make sure that these businesses can flourish in the decades ahead and that they have the right capital structures and investment resources to do that," Mr. Flannery told analysts on Tuesday.

He pointed to the spinoff of GE's credit-card business into Synchrony Financial and the merger of the GE Oil & Gas division into separately traded Baker Hughes as examples of moves that could work for Aviation, Power and Healthcare. GE is now exploring a sale of its majority stake in Baker Hughes.

(END) Dow Jones Newswires

January 17, 2018 12:26 ET (17:26 GMT)