GE explores hybrid deals, spinoffs in strategic review

The logo of General Electric is seen at its plant in Baden, Switzerland November 15, 2017. REUTERS/Arnd Wiegmann - RC1ABBD69C90 (Reuters)

As its strategic review stretches into a ninth month, General Electric Co. is exploring a public offering for one of its divisions and discussing hybrid deals with public companies to combine assets, according to people familiar with the matter.

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Rather than straight asset sales, the hybrid deals would leave GE shareholders with stakes in multiple public companies. The possibilities include spinning off a division to investors or combining a division with a smaller public company in a way that avoids a big tax bill. Such moves would give the industrial conglomerate and its shareholders a chance to participate in the turnaround of struggling businesses rather than risk selling at inopportune times.

GE Transportation could be a model, according to some of the people. GE is now unlikely to sell the business and is preparing for an initial public offering or spinoff of the division, which makes diesel freight locomotives, some of the people said. The unit could be merged with another firm that would leave GE investors in control of a new public company, one person said.

GE, whose share price has tumbled by more than half over the last 12 months, will be facing questions about its portfolio review in coming weeks. The company reports first-quarter results on April 20 and hosts its annual shareholder meeting the following week. Chairman and CEO John Flannery is the headliner at a major industrial conference on May 23.

"The pressure on GE to announce some sort of break-up is very high," analyst Scott Davis of Melius Research wrote in a note to clients last month. While he said asset sales are going slower than investors expected, Mr. Davis expects spinoffs to be more likely.

In October, Mr. Flannery promised to sell $20 billion worth of assets. So far GE has announced a handful of deals totaling less than $4 billion. The company's century-old GE Lighting division has been on the auction block for more than a year. In January, Mr. Flannery said he was considering separate structures for the core divisions -- health care, aviation and power -- in what would amount to a breakup of the industrial giant.

Rather than breaking off units to make smaller companies, GE is considering deals that would build bigger businesses that are better positioned, the people familiar with the matter said. They point to Baker Hughes, an oil-field services company that is majority owned by GE, and the Dow- DuPont deal that combined two firms with plans to eventually split into three different companies.

People close to Mr. Flannery say he is being methodical and measured in his approach to making changes. There is a sense of urgency in the process, but GE also has access to cash and most of its major businesses are performing well, these people said.

GE has a history of divesting businesses in phases -- it sold its media business, NBCUniversal, to Comcast in several steps. Its consumer-finance unit, Synchrony Financial, went public in 2014 and GE sold its last shares in late 2015.

GE combined its Oil & Gas division with Baker Hughes in July 2017 to form a new public company with a former GE executive as CEO. GE said in November it would look to exit Baker Hughes but changed course in February, saying it wouldn't try to sell its majority stake before 2019.

GE has examined different options for the transportation division since last fall but hasn't been able to find a buyer, according to one person familiar with the matter. Weak demand has hit locomotive sales, but a public offering could allow GE investors to benefit if the market turns around.

The Wall Street Journal previously reported GE's effort to exit the business could be complicated because an outright sale could trigger a big tax hit. GE has owned the business for more than a century.

The transportation unit, which had sales of $4.2 billion last year, is one of the company's smaller divisions. It has an enterprise value of about $7 billion, according to Bank of America Merrill Lynch. In the freight rail market, it competes primarily with Electro-Motive Diesel, a unit of Caterpillar.

GE is also reviewing what to do with what remains of its financial-services business, GE Capital. The company in 2015 sold most of the unit, which was once one of the biggest U.S. lenders. But some pieces remain and have caused problems. Shortfalls in a long-term care insurance business recently forced GE Capital to set aside $15 billion in reserves over seven years.

GE is further paring the finance business and is even considering selling the entire GE Capital portfolio, according to the people familiar with the matter. Although GE Capital has about $157 billion in assets, some analysts say it has zero equity value. They say the liabilities and uncertainties might require GE to write a check to complete such a deal. The unit had about $31 billion in cash and $95 billion in debt as of Dec. 31.

Write to Thomas Gryta at thomas.gryta@wsj.com, Dana Mattioli at dana.mattioli@wsj.com and David Benoit at david.benoit@wsj.com