Troubled industrial conglomerate General Electric and its investment bankers at some of Wall Street’s biggest firms are scrambling to come up with a restructuring plan that will appease nervous investors who have sent shares to new lows and are growing weary of the company’s inability to repay mountains of debt, the FOX Business Network has learned.
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The company’s new CEO, Larry Culp, along with investment bankers at Goldman Sachs and JP Morgan Chase are now grappling with what one banker described as a series of “scenarios” that could drastically change the shape of the 126 year old behemoth that currently is in the business of everything from health care to aircraft engines to wind turbines.
Though GE has been shedding units for the past three years as investors have grown weary of its business model, the size and scope of the sales will now accelerate with Culp taking over the CEO job from John Flannery, who was ousted by the company’s board after a little more than a year on the job. GE announced on Tuesday morning that it plans to sell 20 percent of its stake in oil services company Baker Hughes. The move will raise an estimated $4 billion; GE stock rallied close to 5 percent on the news.
In its latest move to deleverage its distressed balance sheet, General Electric is working with Wall Street bankers to restructure business units, sell assets, and possibly raise capital, sources at FOX Business Network have confirmed. GE is weighing numerous scenarios, including possible spin-offs of all or part of its various units, such as its power, health care and aviation units into separate publicly traded companies. A GE spokeswoman did not deny the company is looking at such scenarios.
One interested buyer of GE businesses is the cash-rich private equity giant Blackstone Group, FOX Business Network has learned. A source with direct knowledge of the matter says Blackstone is eyeing a potential purchase of GE assets and continues to have “significant internal discussions” about the possible acquisition, but notes that no final decision has been made.
Meanwhile, FOX Business Network has learned that Dave Calhoun, the head of Blackstone’s private equity portfolio operations, recently spoke with Culp to discuss the issues facing GE. Calhoun, a former GE Vice Chairman who worked at the company for 26 years, is also said to be personally friendly with Culp, according to people with direct knowledge of the matter.
But other than Calhoun, Culp has spoken to relatively few former GE executives about the company’s future. A person close to Culp denies this characterization, adding “Larry has said that he is talking to lots of people who work at GE.” Either way, Culp is said to have had only one conversation with GE’s long-time CEO, the legendary Jack Welch, which was described as a congratulatory call that occurred around the time Culp took the job on October 1. A source close to Welch said the two haven’t spoken since.
A spokeswoman for GE declined comment as did a spokeswoman for Blackstone.
Under Welch, GE had been among the most popular stocks on Wall Street, known for its consistent earnings growth and rich dividend. Welch retired in 2000, handing the reigns to Jeffrey Immelt, who managed the company through the 9-11 terrorist attacks, and the 2008 financial crisis.
But, it has been a tumultuous three years at GE as its stock has been hammered and investors have grown weary of management’s inability to run the unwieldy conglomerate. Last year, Immelt was ousted by the board’s activist investor Nelson Peltz for failing to meet financial guidelines. His successor John Flannery took over the firm in August of 2017, but board members grew wary of the change of pace under his management, coupled with various charges and accounting shortfalls, and he too was forced out.
In interviews and meetings with analysts, Culp has tried to portray GE as a firm that is regaining its footing after years of mismanagement. He has said that the company will continue to downsize in an orderly fashion and has enough liquidity and funding to pay its debt as it continues to deleverage its bloated balance sheet. GE has about $115 billion in debt outstanding and another $31 billion in pension liabilities.
GE’s debt levels has been a recent concern of the Wall Street bond rating agencies, which have downgraded the company’s bonds to close to junk-bond status. In a statement to FOX Business, a GE spokeswoman said: “GE is a fundamentally strong company with a sound liquidity position. We are taking aggressive action to strengthen our balance sheet through accelerated deleveraging and position our businesses for success.”
But, the relative calm that Culp and current management is trying to portray belies the frenzy of activity going on inside GE executive suites and with the company’s investment bankers. As FOX Business was first to report, GE has nearly eliminated its dividend in a move to generate cash even as its continues to look at asset sales.
Indeed, Culp has kept his exact intentions about how he envisions the future of the company close to the vest, bankers say, because he is unsure about what course he should take: A radical downsizing of the company that would mark the end of the modern GE, or simply sell off many of the company’s units that would allow GE to exist in just a few business lines.
Whatever direction Culp takes, Wall Street is growing anxious. On Monday, shares of GE traded below $8, its lowest levels since the 2008 financial crisis, a time when the company needed government assistance to prevent a liquidity crisis.
Even more telling has been the trading in the firm’s credit default swaps—which are insurance contracts on the firm’s debt. When default swaps trade higher, investors are betting that there is a greater likelihood a company might default. In the case of GE, the price of its credit default swaps on five-year debt has tripled over the past 9 weeks as faith dwindles in its ability to repay its debt.
Some GE insiders believe Culp will make drastic changes at GE precisely because he has no allegiance to the firm. GE’s last three CEO’s, Welch, Immelt, and Flannery, were basically lifers at the company. Before joining GE, Culp successfully led manufacturer Danaher for the last 14 years and had a long career at the outfit.
“Culp has no allegiance to the old GE that’s for sure,” said one former long-time senior GE executive. “In the old days we used to say the whole of GE is greater than the sum of its parts. You can’t say that anymore, which means everything is on the table including the end of the GE as we know it.”