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Summary

  • The IPO is the first step towards decreasing the dependence on GE Capital.
  • The performance of other IPOs in the sector indicates that this a good time to offer the shares to the public.
  • Strong fundamentals of the business will fetch a good IPO price.

General Electric (NYSE:GE) has been trying to trim its financial services segment, GE Capital, and focus on the manufacturing segment. In November, the company announced it would spin-off its consumer credit segment - recently, the company has decided to conduct the IPO. In a recent filing with the SEC, the company has named the retail financing segment as "Synchrony Financial". Let's first take a look at the business which the company is going to separate from its GE Capital business.

This segment of GE Capital is the largest provider of the private label credit cards in the U.S. The company offers three types of products: Retail Card, Payment Solutions, and CareCredit. Retail Card is a partner-branded private label credit card, which can be used on 34,000 retail locations. Payment Solutions is used for promotional financing and major consumer purchases - the card can be used at 118,000 retail locations, and the product markets are automotive (tires and repair), home furnishing, jewelry etc. Finally, CareCredit is offered for elective healthcare procedures and services, including dental, veterinary, cosmetic, vision and audiology - the company has 149,000 partners and those partners have 177,000 locations where this card can be used. For a more detailed look at these products; please follow this link to the SEC filing of the company.

Let's move onto the overall performance of the GE Capital and its share towards the total earnings of the company. The table below shows the performance of GE capital over the last three years.

(click to enlarge)Source: 10-K Filing

It is clear from the table that despite a decrease in revenues, the company has been able to get better profits, showing that the operations have become more efficient. One might wonder why the company is trying to get rid of the parts that are actually showing healthy growth in earnings - the reasons is that the harsh memories of the 2008 credit crunch are still fresh and the company simply does not want to take that risk again. At the moment, the focus is on the more profitable and less risky financial segments: Namely, commercial lending and leasing.

Out of the $8.2 billion profit reported from the GE Capital segment, about $2 billion was contributed by the retail finance business, which is being separated from the company. On the other hand, the profit from the commercial lending and leasing segment was also close to $2 billion - however, the profit from this segment has been falling over the last three years. The profit for the commercial lending and leasing has come down from $2.7 billion at the end of 2011 to about $2 billion by the end of the last year. However, as the commercial lending and leasing segment supports the company's efforts to focus more on the industrial segment; it is understandable why GE is getting out of the consumer segments. The table below shows the earnings from the retail segment.

(click to enlarge)Source: Form S-1 (Filing For IPO)

Let's now talk about the valuation - GE plans to sell about 20% of the shares through the IPO and the remaining 80% will be offered to the current shareholders in return to the GE shares or the company may opt to sell in the open market - the distribution transaction, however, will be tax-free if the company offers the shares to the current GE shareholders - General Electric plans to get out by 2015.

At the moment, the segment has about $59 billion in total assets and the company values it between $20-25 billion. According to Reuters, GE is looking to raise about $3.5 billion from the IPO. Looking at the trend in the IPO in the consumer credit segment; I believe the company will be able to get a good price for the shares. According to Bloomberg, the firms raised about $10 billion in IPOs in the consumer credit segment, indicating the investor confidence in the sector is high. Two examples are Springleaf Holdings (NYSE:LEAF) and JGWPT Holdings (NYSE:JGW) - both these offerings have shown strong growth since the IPO.

(click to enlarge)

This might be the best time for the company to conduct the IPO as the conditions are favorable, in my opinion. The consumer credit IPOs are doing well and the business of these companies is growing at a healthy pace. Furthermore, the expected recovery in the economy bodes well for the credit card companies are the spending patterns will become more favorable for these businesses. As a result of the strong expected sales, the company will be able to price the IPO attractively. The metrics for the retail finance segment of GE are strong - Average Net interest margin is around 19% and the net charge-offs as a percentage of loan receivables has come down from 5.8% in 2011 to 4.7% during the last year.

Bottom Line

I believe the IPO will be a success for the company and if the proceeds are used wisely; we will see a net positive impact of the transaction. Synchrony will also have considerable growth opportunities due to the improving economic conditions impacting the spending pattern as well as strong performance of the sector. Furthermore, GE stock still suffers due to the negative sentiment about the management, in my opinion, and the Synchrony stock will do well as a standalone. Overall, I believe it will be a good transaction and the company will move a step close to the goal of achieving less dependence on the financial segment. GE has proposed the ticket symbol of "SYF". I will strongly recommend that GE shareholders and investors interested in buying SYF shares read the full S-1 document (link).

Source: Is This The Right Time For Retail Finance IPO?