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Summary

  • General Electric’s IPO of Synchrony Financial (formerly GE Capital Retail Finance) may be facing some pressure as regulatory concerns are raised.
  • The company has noted that it expects its industrial segments to more than offset the earnings declines from GE Capital.
  • Barron’s noted that as GE becomes more industrial focused, its valuation will become more in line with its other industrial peers.
  • In addition, GE may be starting to attract shareholder activism according to a Fox Business report.

General Electric (NYSE:GE) has been making good progress with its effort to diversify into an industrial focused stock. About a week ago, it filed SEC form S-1 for the IPO of Synchrony Financial, better known as GE Capital Retail Finance. By revenues, this unit represents about 22% of GE Capital and about 7% of General Electric overall.

General Electric's IPO of Synchrony Financial faces some hurdles

However, General Electric may be facing some unexpected hassles with the IPO.

On March 18, the WSJ reported that two federal regulators were conducting investigations into GE Capital's various credit card businesses for potential violations of consumer finance laws.

Basically, the Consumer Financial Protection Bureau, or CFPB, is looking into the use of certain "debt cancellation products" and related marketing practices by GE Capital. In addition, General Electric notified the CFPB about a problem with its Spanish-language filings of settlement notices for delinquent clients in Puerto Rico, which may be a violation of the Equal Credit Opportunity Act. The matter has been referred to the Department of Justice, or DOJ, which has initiated a civil investigation.

In an unrelated manner, there are concerns regarding a potential "Bank Tax" being championed by Dave Camp, a Republican Lawmaker from Michigan. As chairman of the House Ways and Means Committee, Mr. Camp has a plan that would levy a 0.035% tax on the total consolidated assets of financial firms with assets greater than $500 billion. Many firms of this size are already labeled "systemically important," which itself carries increased regulatory oversight. GE Capital is one of several such firms being targeted by this proposed tax.

Barron's is bullish General Electric

In a recent Barron's article, it was noted that General Electric may fetch a higher multiple, and thus a higher stock price, by cutting its exposure to the financial arm. General Electric currently trades at about 15x 2014 earnings, well below its industrial peers which command multiples near the 20x range.

In addition, by downsizing GE Capital, General Electric will be increasing its exposure to its industrial growth segments, such as aviation, healthcare, Oil & Gas, and energy management.

The 2014 guidance calls for its industrial segments earnings to largely offset both earnings and revenue declines from GE Capital. Indeed, 60% of General Electric's profits will be coming from the industrial side this year, up from over 50% a few years back. The company is targeting about 70% of earnings coming from the industrial segments by 2015.

Is General Electric attracting shareholder activism?

According to a Fox Business report, General Electric has confirmed that a meeting took place between its senior management team and Nelson Peltz in August of last year. Mr. Peltz, the CEO of Trian Fund Management LP, discussed shareholder activism with the company, especially what a shareholder activist might want out of GE's management.

This move may have been triggered by General Electric's underperformance compared to the broader market in the past few months.

While General Electric is trying to appease shareholders by buying back stock and increasing its dividend, there is always a chance for increased activism. In addition, the divestment of GE Capital should simplify the overall corporate structure and allow for easier cost cutting and other efficiency programs.

Conclusion

I have long argued GE Capital is an albatross for General Electric, lowering the overall multiple for the company and adding substantial risk.

Needless to say, I think the above regulatory problems are clear examples as to why General Electric needs to downsize GE Capital. While earnings may be impacted short term, it will lower the overall risk profile of the conglomerate and may serve to increase the multiple applied by the market for the remaining company.

Disclaimer: The opinions in this article are for informational purposes only and should not be construed as a recommendation to buy or sell the stocks mentioned. Please do your own due diligence before making any investment decision.

Source: Will General Electric Face Activist Pressure?