Larry Culp, CEO of General Electric
Scott Mlyn | CNBC
General Electric’s announcement on Wednesday that it would sell its jet leasing business to rival AerCap and add GE Capital to its balance sheet is the latest indication that CEO Larry Culp is simplifying operations as he blends in with his core industrial business .
GE Capital Aviation Services, or Gecas, is the largest asset in the company’s finance arm, GE Capital, which nearly sank the company during the financial crisis when it suffered enormous losses. The company has since cut capital, and Culp has tried to expedite GE’s exit from finance.
With the sale of Gecas, the company announced that it would integrate GE Capital into the parent company instead of reporting it as an independent captive company. GE is using the money, approximately $ 24 billion in cash from the sale, to pay off debt that has overshadowed the conglomerate’s industrial business since the 2008 crisis.
“Focused, Easier and Stronger”
Culp, who was hired as CEO in 2018 to get the company going again after years of turmoil, was vocal about this desire to move away from Capital. Wednesday’s announcements are among his key steps in realigning the company with its industrial roots. But billions of debt from Capital’s remaining businesses still remain above the company.
GE stock fell more than 6% early on the day of trading after hitting nearly $ 14.50 per share in premarket trading. Stocks are up nearly 30% since Jan. 1.
“This really marks the transition to a more focused, simpler, and stronger GE,” Culp said in an interview with CNBC’s David Faber. “We will be able to focus our four core industries on energy transition, precision healthcare and the future of flight, and there is no question that we will be a stronger company financially and operationally.”
The deal is “incredibly important” to making GE a “focused industrial game,” Culp said at the GE Investor Day presentation on Wednesday after the deal was announced.
Bank of America’s Andrew Obin agreed with Culp’s view. He said investors “we believe have remained cautious about GE Capital and financial assets / leverage outside of its core industrial operations,” he said in a statement to clients Monday after the Wall Street Journal reported on the Gecas deal.
“A smaller GE capital would simplify GE’s history,” he added. Obin also raised his price target on GE from $ 14 to $ 15 per share.
GE will receive approximately $ 24 billion in cash and a 46% stake in the merged company, which will allow GE to reduce its debt by about $ 30 billion after the Gecas transaction closes in about a year with the proceeds from the business and the available cash can be used. Culp said the company will reduce debt by $ 70 billion since the end of 2018 once the Gecas deal is closed.
However, S&P Global Ratings said it could lower the company’s credit rating once the deal is complete, depending on how much debt the company has after the deal. While Gecas was GE Capital’s largest asset, the unit will maintain a smaller leasing operation that will help fund the purchase of GE power and wind turbines, as well as a legacy insurance business that has plagued the company with losses over the years.
Upon closing, GE Capital will continue to generate $ 21 billion in net worth excluding Capital’s large and risky insurance portfolio, CFO Carolina Dybeck Happe said on the company’s Investor Day Wednesday morning.
S&P estimates that GE Capital’s leverage will increase to six times its net worth after consolidating GE Capital’s remaining debt on its balance sheet, “even if GE uses the cash on closing to reduce the debt”.
S&P noted that Gecas was previously treated as a separate proprietary financing unit supporting all of GE Industrial’s operations. S&P plans to evaluate GE’s overall financial position on a consolidated basis going forward.
“The sale of GECAS is a big step in GE’s exit from financial services and will generate significant funds to reduce the debt and liabilities of GE and GE Capital,” said S&P. “This transaction also simplifies operations, accounting – and GE’s reporting structure. “
Culp said he was optimistic the company could further reduce debt through expected advances in industrial companies in 2021. The Gecas deal gives GE a 46% stake in the combined company, which the company said was valued at around $ 6 billion on Tuesday. Culp said he expected these shares to appreciate in value and that at least some of the shares would be gradually sold off after the lock-up period to provide more money to reduce debt.
Along with the announcement of the deal, the company also confirmed its guidance for 2021, forecasting free cash flow of $ 2.5 billion to $ 4.5 billion for the year. The company also forecast adjusted earnings of 15 cents per share to 25 cents per share in 2021. That doesn’t account for a $ 3 billion charge on the deal that GE is planning in the first quarter.
The anticipated positive cash flow includes the assumption that the company’s aviation division, which manufactures jet engines and is historically the company’s most profitable business, will rebound in 2021 as demand for global travel picks up again during the pandemic. Culp said there were no certainties about the expected recovery, but he was confident the company could meet its guidance.
Morgan Stanley’s Josh Pokrzywinski recently noted that there is plenty of room for cash flow rebound in aviation. Last week he raised his target price on the stock to $ 17, a high among Wall Street banks. He said in a statement to customers Monday that the Gecas deal could free up capital for GE to become more aggressive in its industrial businesses.
He said it brings GE one step closer to becoming “a well-respected industrial company.”