General Electric: Divestitures to Continue
General Electric (GE) has had a torrid time. Cash is needed to prop up a failing mix of businesses, and everything but the kitchen sink is being thrown at the problem. But is it enough? Are more divestitures due?
GE was a sprawling conglomerate in 2008. Revenues at a high of $180bn, units cutting across traditional sectors of financial services, insurance, healthcare, aeronautical engines, oilfield services, locomotive manufacturing, distributed power, entertainment, plastics, renewable energy, and electrical equipment…and then the world turned against it. The 2008 crisis hit financial services, oil revenues dropped with oil prices, gas-fired power stations fell with the onslaught of renewables, followed by more recent shocks of a $22bn goodwill impairment in distributed power (2018), $5bn additional committed to pensions (underfunded by $28bn in 2017), and an announcement that GE Capital needed to commit $15bn to cover insurance liabilities, prompting an SEC investigation into accounting methods.
Add onto that a history of high levels of debt, most of it long term but a significant proportion in the short term, including commercial paper. The coveted AAA credit rating from 2009 is now a distant memory, with the rating having dropped 2 notches in 2018 to BBB+. Being only 3 notches above junk status has seen GE’s interest costs increasing, and risk premiums on GE’s most liquid debt rose to 2.29% above comparable Treasuries in the US in November 2018, the widest they have been in the 2 years since issue. Moreover, the cost of protecting GE’s debt against default for 5 years rose 20 bps to 149 bps, again the highest in 2 years.
In its favor, GE has been winding down its commercial paper (CP) exposure. Once the largest global CP borrower ($106bn in 2007), it has reduced that down to $8bn in 2017, although part of this must be credited to their reduced access to commercial paper markets. Bank lending is its replacement, and while it attracts a higher interest rate, GE has a facility of $40bn it can call on (half expiring in 2020, half in 2021) and only $2bn drawn so far. Divestitures can be seen as taking the bull by the horns to ease cash flow pressure, but with $134bn of debt in 2017 there is still a long way to go.
John Flannery, CEO in October 2018, had been pushing for mass divestitures, including locomotive manufacturing, distributed power and entertainment units in 2018. But Larry Culp, new CEO since October 2018, isn’t stopping there. He plans to slim down GE to just 2 sectors – aviation and power. Divestments of oilfield services and healthcare operations are already being talked about. With $20bn of assets already sold or earmarked, cash is coming in and debt is reducing, but there is still plenty of debt left, and big cash generative units are gone – the 2018 divestments alone accounted for 30% of group revenue. Analysts are questioning whether the now apparent lack of diversification and the increased risk of profit volatility actually set up GE for further woes, rather than a slimmed down and efficient future. And how attractive is a business focusing on aviation and power – do these really attract the same investors? It is our opinion that the divestitures at GE will continue apace, persisting into a full-blown carve up, similar to AT&T in the 1980s. GE is sure to keep making headlines in M&A news.