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Industrial Conglomerate Pioneer General Electric, to Break Up into Three

On Tuesday, United States industrial company General Electric announced splitting into three public companies to simplify its business, reduce debt, and resurrect a battered stock price. With the dissolution, the 129-year-old conglomerate that was once America's most valuable firm and a global symbol of American commercial domination has come to an end. According to the Boston-based firm, the three firms will focus on energy, healthcare, and aviation.

In early 2023, GE plans to spin off the healthcare company, which it expects to keep a 19.9% interest. GE Renewable Energy, GE Power, and GE Digital will be combined and spun off in early 2024. Following the split, it will be run by Culp as an aviation firm. General Electric's other assets and liabilities, notably its runoff insurance business, will be passed on to the aviation company.

A company spokesperson said the brands and names of the spun-off units would be decided later. The boldest attempt under Culp, who took GE's reins in 2018, is to simplify its business. Measures taken so far have improved GE's balance sheet, putting it on track to reduce debt by more than USD 75 billion by the end of 2021.

In 2023, the company intends to generate more than USD 7 billion in free cash flow, and it plans to sell its stakes in Baker Hughes, AerCap, and the healthcare unit to reduce its net debt to less than USD 35 billion. According to Culp, GE's accomplishments in fixing its balance sheet and operating performance set the way for the decision to separate the business.

The Chief Executive did not expect the spinoff to face any regulatory or labour issues and said there was no investor pressure behind the decision. Instead, these are moves geared toward making GE stronger, helping the businesses and the teams perform better.

Culp's strategy is in stark contrast to GE's path in the 1980s and 1990s under Jack Welch, who expanded the company into an industrial behemoth.

General Electric was the founding member of the Dow Jones Industrial Average in 1896 and spent more than a century in that illustrious stock index before being kicked out in 2018 due to years of declining valuation. It invented the first electric cooking range and clothes dryer, and the first nuclear power plant and the United States space programme. Television, movies, and insurance have all piqued its curiosity, as have lightbulbs and locomotives. However, since the 2008 financial crisis, it has faced investor scepticism about its capacity to turn a corner while suffering from debt. Due to the company's declining finances, Chief Executive John Flannery was fired, and the keys were handed over to Culp.

In 2015, activist investor Nelson Peltz took a stake in General Electric and demanded changes at the company, including moving away from finance operations and toward its industrial roots. On Tuesday, Peltz's company, Trian, said that it enthusiastically supports this important step in the transformation of GE. GE's aviation business, usually its cash cow, makes jet engines for Boeing Co and Airbus SE. However, questions remain over how the company will fund the unit's operations, which tend to be very capital-intensive.

The company reckons the aviation unit's low-cost structure, strong order book, and investment-grade balance sheet would let it tap capital markets. But some analysts say the unit's valuation could suffer as it will also take over GE's financial liabilities after the split. Analysts at Barclays wrote that investors debate about how much the aviation valuation should be penalized vs peers because of the financial liabilities.

However, an industry source said the aviation business had been distracted until now by propping up the rest of the company, which took a lot of the unit's bandwidth. The unit is expected to be valued at more than USD 100 billion after the spinoff, the source added. Culp also said the split would make different units "more focused" and result in "greater accountability."

The company anticipates USD 2 billion one-time charges for separation and operational expenditures and tax costs of less than USD 500 million.

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