BY ALEXANDER SOULE
Hearst Connecticut Media
General Electric is selling most of its GE Capital subsidiary to focus on its industrial businesses, starting with the $26.5 billion sale of GE Capital Real Estate and with the Fairfield-based company seeking other buyers over the next 24 months for the commercial-lending arm and other assets.
GE shares surged $2.78, or 11 percent, Friday afternoon to $28.53, the highest price since the summer of 2008 prior to the financial collapse.
CEO Jeffrey Immelt had resisted calls by some analysts for the conglomerate to dump GE Capital, which had long been a cash cow for the parent company, with Immelt making selective divestments instead to prune risk.
Immelt may have been spurred to accelerate that pace after financial regulators tagged GE with the label of a “systemically important” financial institution, forcing GE to reserve cash to maintain capital ratios that otherwise could be used to invest in growth businesses or bolster share value through stock buybacks.
Call it the straw that broke the cow’s back – if coupled with opportunity as financial institutions look to grow via acquisition in an environment of low interest rates and heavy competition for assets that offer attractive yields.
“I think in its essence this is a capital allocation decision,” Immelt said. “We just did not see an attractive proposition for getting a return on capital that made sense for the company or made sense for shareholders. … The market for these assets is just extraordinarily attractive today.”
GE is taking a charge against first-quarter earnings of $16 billion and said it expects to get $35 billion in dividends from GE Capital. GE’s board of directors authorized the company to buy back $50 billion in shares, with the goal of reducing the number of shares outstanding and thus boosting their value.
While GE has made momentous divestments under Immelt, to include NBCUniversal and its GE Plastics division that served as a training ground for many senior executives, those deals did not hit as close to home as the piecemeal sale of the commercial lending arm of GE Capital, which is based in Norwalk.
GE intends to retain finance operations that are closely intertwined with its industrial divisions. GE Capital Aviation Services and GE Energy Financial Services have some 1,200 employees in Stamford; GE Capital also has a Danbury office. And the company began a process last year to spin off its credit card and consumer finance operations as an independent company called Synchrony Financial, which has kept its headquarters in Stamford.
“The success of Synchrony and other dispositions … give us tangible proof points that other owners place more value on our platforms than our own investors do as part of GE,” said Keith Sherin, CEO of GE Capital.
GE set a goal of generating 90 percent of its earnings from industrial businesses, with those units generating 58 percent of its profits last year.
GE has already gotten the ball rolling with the $26.5 billion sale of GE Capital Real Estate to Blackstone Group and Wells Fargo, with Blackstone making no immediate statement on its plans for the Norwalk operations of GE Capital Real Estate.
The Blackstone deal was just the first move of what GE hopes will be a speedy dismantling of GE Capital to other buyers.
“We sold Real Estate, obviously, in the quarter and we’re going to start selling everything else today,” Sherin said. “The faster we go and the smaller we get, certainly in the U.S., the earlier we will be able to address the characteristics that made us systemic.”
GE employees and investors can steel themselves for a flurry of change in the coming months, with Sherin emphasizing “speed is going to matter” in finding buyers for assets, as the company looks to cash in while markets are optimal. “We weren’t really planning to sell all these (assets) this way, so we’re going to have to do some preparation to get information available for buyers in a way that will help them make their decision and help us run an effective auction,” Sherin said. “That will take some time, but we are ready to go.”
Hearst Connecticut Media includes four daily newspapers: Connecticut Post, Greenwich Time, The Advocate (Stamford) and The News Times (Danbury). See stamfordadvocate.com for more from this reporter.