Over the past few weeks, General Electric (NYSE:GE) has been extremely busy. The company has put tons of effort and energy towards its proposal to buy energy assets held by France's Alstom (OTCPK:ALSMY). To put it mildly, GE has had to jump through many hoops to get French government approval. However, now that the company has emerged victorious in the battle for Alstom, it can refocus on its long-term goal of downsizing its GE Capital.
GE sells GE Money Bank to Santander
On June 23, it was reported that Spain's Banco Santander (NYSE:SAN) was buying GE Money Bank, GE Capital's consumer finance business unit in the Nordic countries, for 700 million euros ($950 million). Closing is expected for sometime in the second half of 2014 and is expected to reduce Santander's key core capital ratio by 8 basis points.
While minor given the size of the company, this sale is representative of GE's efforts to downsize its GE Capital unit.
Synchrony Financial IPO cannot come soon enough
Many of my readers will know that I am not a fan of GE Capital. As many will remember, GE was greatly impacted by the losses suffered by GE Capital during the 2008 financial crisis, forcing it to, among other things, reduce its dividend 66% and seek $139 billion of FDIC backing via TARP.
However, as shown with the GE Money Bank sale, the company is trying to lower its dependence on the segment. GE has stated numerous times that it aims to have its industrial segments contribute at least 70% of earnings by 2016.
To get there, GE will need its industrial segments to continue to post above average organic earnings growth rates, currently estimated at 5% to 7% per year. Some segments have been outperforming these numbers, especially oil & gas (shale oil demand) and aviation (jet engine orders).
In addition, the acquisition of Alstom's energy assets is a major event for GE. Not only will these assets shift earnings more towards the industrial side, but the move will allow GE to productively deploy a large chunk of its overseas cash pile.
Synchrony is basically GE's consumer lending division, offering private label consumer credit cards for many well-known brands such as Amazon (NASDAQ:AMZN), Belk (OTCPK:BLKIA) (OTCPK:BLKIB), Brooks Brothers, Chevron (NYSE:CVX), Dillard's (NYSE:DDS), Gap (NYSE:GPS), J.C. Penney (NYSE:JCP), Lowe's (NYSE:LOW), Sam's Club, T.J.Maxx (NYSE:TJX) and Wal-Mart (NYSE:WMT).
General Electric is aiming to raise about $4.0 billion for about 20% of the business, valuing Synchrony at over $20 billion. The remainder is planned to be distributed to GE shareholders via a tax-free transaction or in exchange for GE common stock. The IPO is expected for sometime in Q3/Q4 2014.
The unit represents about 30% to 40% of revenues for GE Capital and is by far its biggest concentration of credit risk. In my opinion, GE has little reason to be in this sort of business, as you will see below.
GE Capital ordered to refund $225 million
Last week (June 19), Synchrony announced that it had settled claims regarding illegal credit card practices with the federal Consumer Financial Protection Bureau and the Justice Department.
The company has agreed to pay $225 million to consumers, $56 million to 638,000 consumers who were subjected to deceptive marketing practices and an additional $169 million to about 108,000 borrowers who were denied debt relief offers because of their national origin.
This settlement was the largest ever for credit card discrimination. In addition, if you read the full text of the settlement (link), you would see that GE was also ordered to pay several million in civil penalties and other fines. The company may have faced an even higher penalty if it had not self-reported the violation and fully cooperated with the investigation.
The federal investigations were first disclosed by Synchrony Financial, the name adopted by G.E.'s consumer credit business on June 2, in documents it filed for an initial public offering. The company, which is based in Draper, Utah, and has more than $39 billion in assets, provides store-branded credit cards that are sold to consumers by retailers across the country.
The investigation by the consumer protection bureau found that GE Capital Bank marketed products promising debt cancellation of a percentage of the consumer's balance in case of events like involuntary unemployment or disability, but failed to disclose the precise requirements to be eligible for the cancellation and the fees involved.
The bank also did not offer delinquent customers the possibility of paying off a portion of their debts if they asked to communicate in Spanish or had a mailing address in Puerto Rico - even if the customer met the promotion's qualifications. This violated the Equal Credit Opportunity Act, the investigation found.
GE is on the right path by focusing on its industrial segments and further selling off GE Capital assets. While some may argue that the Alstom deal came with too many strings attached, I think the quality of the acquired energy assets, namely the turbines, is well worth the hassle.
Here's hoping the Synchrony Financial IPO comes soon. While we are waiting, GE is offering you 3.30% and a modest valuation. In addition, the stock should start commanding a higher multiple once a larger chunk of earnings comes from the industrial side.
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Disclosure: The author is long GE, WMT. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.
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