GE Finally Joins Victims of Financial Crisis

General Electric Co. (GE) said Wednesday that it will sell "at least" $12 billion in common shares to investors, and another $3 billion in preferred stock to Warren Buffett’s Berkshire Hathaway Inc. (BRK.A), making GE the latest U.S. giant that’s been forced to raise capital in recent weeks.

The moves come as the conglomerate - whose GE Capital finance arm generates nearly half the company’s revenue - has effectively seen itself reclassified as a financial-sector stock because of investor worries concerning GE’s financing businesses. As a result, GE shares have been pounded. Until last week, however, GE leaders had repeatedly maintained the company’s finance arm was experiencing no real problems.

That changed last Thursday, when GE reduced its earnings expectations, ended its stock repurchase program, and announced it would hold its dividend steady through 2009, thus becoming another victim of the financial crisis. This will be the first time in 32 years that the company won’t boost its dividend. GE cited "unprecedented weakness and volatility in the financial-services markets," and unveiled those startling protective measures to strengthen its capital and liquidity.

The company has been shedding consumer-oriented businesses and focusing its growth efforts on global industrial opportunities - particularly in China, where executives hope to double the company’s business to $10 billion a year by the decade’s end, Money Morning reported recently.

GE Chief Executive Officer Jeffrey R. Immelt ultimately wants to restructure GE in such a way that that its industrial business accounts for 60% of the company’s earnings by the end of 2009. That would effectively reduce GE Capital’s contribution to GE’s bottom line by 13%, as financial services made up 53% of the company’s 2007 profit.

GE shares closed Wednesday at $24.50, down $1 each, or 3.92%. They were down as much as 10% at one point. The stock has plunged 42% from its 52-week high of $42.15 and is down by a full third so far this year.

Details of the Deal

Under the common-stock offering, underwriters will have a 30-day option to buy shares representing another 15% of the offering amount from GE to cover over-allotments, The Wall Street Journal reported. The company expects to announce the actual pricing of the stock offering before the market opens Thursday.

The $12 billion company officials are hoping to raise represents roughly 5% of GE’s market value.

The near-term fate of GE Capital depends on two sensitive corners of the economy: commercial real estate and loans to midsize businesses. The fact that the credit crisis has put a crimp on the liquidity both those sectors need to operate, and is actually causing the economy to weaken, means the ongoing financial crisis will hurt GE’s earnings even more and increase the challenge the company faces in its attempt to sell some of its businesses.

Credit default swaps for GE Capital tightened dramatically once the company’s stock-offering plans were announced Wednesday, The Journal reported. It now costs $500,000 to protect $10 million of bonds for five years, down from $650,000 before the news, Phoenix Partners Group told The Journal. Debt-protection costs got as high as $740,000 earlier in the day as worries escalated about GE’s ability to access the commercial-paper and corporate-debt markets, the newspaper report stated.

Under the offering, the underwriters will have a 30-day option to buy shares representing another 15% of the offering amount from GE to cover over-allotments. The company expects to announce the pricing of the deal prior to the market opening Thursday. At $12 billion, that is roughly 5% of the company’s market capitalization.

Buffett’s Back

Buffett’s preferred stock deal with GE comes just a week after he made a $5 billion investment in Goldman Sachs Group Inc. (GS). In that deal, in addition to agreeing to buy $5 billion in perpetual preferred Goldman Sachs shares that pay 10% interest, Berkshire Hathaway receives warrants giving it the right to buy $5 billion worth of Goldman’s common shares at any time over the next five years at a price of $115 per share.

Goldman Sachs shares closed at $134.50 Wednesday, up $6.50 each, or 5.08%. Based on that closing price, Buffett has a potential paper profit of $847.83 million on those Goldman warrants.

"Goldman Sachs is an exceptional institution," Buffett said in a statement. "It has an unrivaled global franchise, a proven and deep management team and the intellectual and financial capital to continue its track record of outperformance."

Buffett’s deal with GE calls for Berkshire to receive preferred shares that carry a 10% dividend and that are callable after three years. Berkshire also receives warrants to buy $3 billion common shares at $22.25 each. At Wednesday’s close, Buffett has a paper profit of $303.37 million on this investment.

In making his second major bargain-basement credit-crisis-related investment in a week, Buffett also took steps to express his confidence in the U.S. financial system. Indeed, in turning his attention to GE, Buffett issued a statement that said the company has "strong global brands and businesses with which I am quite familiar. I am confident that GE will continue to be successful in the years to come."

Immelt, the GE chairman and CEO, said the company’s strategic repositioning moves and its capital-raising deals will make GE more nimble and will allow the firm "to execute on our liquidity plan even faster." Indeed, the investments from Buffett and the cash that will be raised from the common-stock sale will "give [GE] the opportunity to play offense in this market should conditions allow."

According to The Journal, Immelt reiterated the company’s long-held commitment to its coveted "AAA" credit ratings and added that the company continues to "successfully meet our commercial-paper needs."

Original post

Comments

[crankyinvestor:]

so now Buffet has a seat at the GS and GE tables; and all because he had the foresight to keep some dry powder and avoid leverage. sort of reminds you of Warren Buffet of the 90s; and Warren Buffet of the 80s; etc.

2008 Oct 02 05:40 AM

[GregT:]

While I like the Buffet investment in GE. I wonder if this is the end of the road for GE disappointments. They have been disappointing investors all year. And the communication has been TERRIBLE. Here is the scene. The stock starts going down, GE says things couldn't be better and there are no problems. A week or so later, GE issues reduced guidance, holds their div for the first time in 30 years while claiming that things are still great and they will keep their AAA rating. Of and they have absolutely no commercial paper problems. Then a few days later they annouce the Buffet deal and a stock dilution.

In my book, this is a company that is just short of dishonest and doing the spin doctor thing. Time for a new CEO.

2008 Oct 02 07:20 AM

[Bull in Chi...:]

Bill O'Reilly agrees that Immelt is a "pinhead" and does not tell it like it is. A new CEO is worth thinking about if I was on the Board of Directors. In the meantime I'll take my 5% dividend and sit it out. GE is well positioned and will do ok.

2008 Oct 02 08:17 AM

[CTMike:]

New CEO? How about a new CEO and board of directors! If the board doesn't know what's going on they should get dismissed for incompetence. If the board does know what's going on they should get dismissed for participation in the debacle.

Doesn't it sound like GE is using the exact same script as all the other financial institutions that eventually collapsed, denial, denial, denial, surprise we have a little problem and need to raise a few $B in capital? Next will be an announcement that the problem is a little bigger than thought; then depending on what influence the y have with the B&P team, they may get some bail out $$. Ever wonder what that takes?

2008 Oct 02 09:34 AM

[Rick B:]

Add to Greg T's commets the fact that GE was a$58 stock in Jan 2001 and is now valued at $22.25 by GE's own valuation almost 8 years later,this has been a terrible investment.Any co. that needs to borrow capital at 10% is in trouble.Also, the 3 billion warrant to buy common shares at $ 22 will hold down share price for some time.This long time invester is gone.

2008 Oct 02 11:43 AM

[geco2897:]

Following is an exerpt from an inter office communication regarding GE fininacial's current situalton. They are no longer accepting any new deals EVEN ON LONG TERM CUSTOMERS WITH EXCELLENT PAY HISTORY!!!. THEY'RE TRYING TO CLEAN IT UP ENOUGH TO USE what they have AS LEVERAGE TO MAKE IT THROUGH THE END OF THE YEAR WHEN TO RUMORS ARE FULL BUYOUT.

Going forward from this day, GE will no longer accept applications. This includes upgrades as well. This point is extremely important, you can no longer pull buyouts from the web. Let your XXXXXX administrators get those for you. They will have to get those from XXXXXXXXXXXXX If you do, GE will not accept it. They will accept coterminous add on’s , but the credit has got to be squeaky clean. Having said all this, get your buyouts submitted now, if you wait until month end, you will not get it in a timely manner and your deal will roll to the next month. US Bank is first option.


On Oct 02 05:40 AM crankyinvestor wrote:

> so now Buffet has a seat at the GS and GE tables; and all because
> he had the foresight to keep some dry powder and avoid leverage.
> sort of reminds you of Warren Buffet of the 90s; and Warren Buffet
> of the 80s; etc.

2008 Nov 04 05:52 PM