Floating the Finance Unit
General Electric (NYSE: GE) recently moved ahead with plans to split off GE Capital into a separate company. According to the Financial Times, GE has hired Goldman Sachs and J.P. Morgan as lead investment bankers to float an initial public offering (or IPO) of GE Capital within the next two months. Analysts expect the IPO to be the largest stock offering since Facebook in May of 2012.
GE Capital offers private-label credit cards and other consumer-finance products, such as personal loans. The consumer finance unit is so central to GE's overall operations that the company was forced at the height of the 2008-09 credit freeze to rely on government debt-guarantee programs. Since the financial crisis, GE has reconsidered its strategic business mix.
Timing the Move
Last year, as capital markets grew stronger, GE announced that it was planning to split off GE Capital. According to Bloomberg, GE Capital's chief executive stated that GE would float up to 20 percent this year. The rest of the spinoff will be accomplished through a tax-free stock distribution to existing shareholders in 2015.
This bold move will reduce GE's exposure to credit risks and the volatility of financial services. In addition, after the upcoming divestiture, GE will be more focused on its core manufacturing businesses. GE's diverse manufacturing lines include aircraft engines, medical equipment, home appliances, and energy turbines.
Outlook for Shareholders
GE's stock performance has lagged its more-focused industrial rivals, such as Honeywell (NYSE: HON) and United Technologies (NYSE: UTX). Over the past 12 months, GE's stock has returned approximately 10 percent, compared to 31 percent for Honeywell and 21 percent for United Technologies. See our prior article here and here.
GE expects to unlock shareholder value through the spinoff of GE Capital. Once the consumer-finance divestiture is completed, GE will continue to offer commercial and industrial financing to facilitate purchases of its aircraft engines, locomotives, and other products.
We expect GE to be more highly valued by investors after the spinoff, since the company is returning to its core competency of manufacturing. The company aims to be a market leader in all of the segments where it competes. GE has a long history of creating shareholder value.