GE Dilution Questioned

While much of the market is staying on the sidelines with cash in hand, Warren Buffett has made some major investments in names like Constellation Energy Group Inc. (CEG), Goldman Sachs Group Inc. (GS) and now General Electric Co. (GE).

His Berkshire Hathaway Inc. (BRK.A) announced plans to purchase $3-billion in perpetual preferred GE stock and warrants to buy 134.8 million common shares at any time in the next five years. The price tag was set at $22.25 a share, below GE's market price and nearly half of where it was trading a year ago. GE is also offering at least $12-billion in common shares to the public.

To bolster its liquidity position, the company suspended the dividend GE Capital pays to the parent and halted its share buyback just last week. On the conference call, CEO Jeff Immelt said an equity offering wasn’t necessary. However the continued erosion of financial conditions and uncertainty about the government’s rescue plan changed things enough to force GE to make a move to bolster liquidity and support its credit rating.

Citigroup’s Jeffrey Sprague told clients:

While this was clearly a difficult step to take, it should give GE more operating and strategic flexibility.

Gimme Credit analyst Kathleen Shanley said she approves of GE’s move to raise new capital in an attempt to reassure fixed income investors given the troubles in the credit markets. However, she noted that it is not very reassuring to see that it felt pressure to offer terms that dilute its existing shareholders.

As for the government’s bailout plan, Ms. Shanley noted that GE does not plan to sell assets to the Treasury and it continues to issue commercial paper, with roughly $90-billion outstanding at the end of September. However, if the legislation is not approved, GE thinks this could have a “material adverse effect on its operations.”

And if the market disruption persists and it is unable to lower its asset levels, GE may use funds from the equity offering to pay off short-term debt and may draw upon its $62-billion in bank lines.

Ms. Shanley said:

GE’s diverse segments make it something like a mini-economy, and so if the global economy goes into a deep recession, earnings are unlikely to be unscathed; but the company’s strengths remain formidable, even presuming the likelihood that credit losses will remain elevated for the foreseeable future.

Comments

[Gary Lucido:]

So why didn't they just do a rights offering?

2008 Oct 03 06:51 AM

[Russ Krull:]

Good question Gary.
Assuming this deal was insurance against the short term credit paper market locking up, time would have been a critical factor. The Buffett deal puts $3 billion in hand immediately and another $3 billion on tap from the warrants with a phone call to Omaha.

2008 Oct 03 08:07 AM

[Vox Rationalis:]

Russ - do you know how warrants work? BRK isn't putting another dollar into GE until it decides to, which is VERY likely to be within a couple of months of the expiration of the warrants.

The deal brought $15B in, including $12B from the common offering, at an overall cost which may or may have been better than a secondary alone.

2008 Oct 03 08:22 AM

[Russ Krull:]

BS Detector - You are correct, I need to get coffee before posting. GE gets $3 billion now from Buffett for the preferred, $3 billion from Buffett if and when he chooses to exercise the warrants and $12 billion from the secondary when it closes.

2008 Oct 03 08:57 AM

[Norman Lepo...:]

Jeff Imelt has lied too many times to the shareholders. He has lost his credibility.

2008 Oct 03 10:51 AM

[notsosmart:]

a ceo lying?really.the new motto for our monopoly money"TOO BIG TO FAIL,TOO MANY TO JAIL"

2008 Oct 03 12:26 PM