As the first definitive step to reduce credit risks and focus on core industrial businesses, General Electric Company (GE) has recently filed an initial public offering (IPO) of its North American consumer lending unit. The IPO is expected to be closed by late 2014. Subsequently, GE Capital Retail Finance will operate under the name “Synchrony Financial” and will trade on the New York Stock Exchange under the symbol SYF.
The Spin-Off
General Electric is currently contemplating to completely exit the Retail Finance business through a split-off transaction in 2015. This might also include the divestiture or disposal of all or the remaining interests in the business.
The North American consumer lending business includes store credit cards for retail giants like Wal-Mart Stores Inc. (WMT) and J. C. Penney Company Inc. (JCP). General Electric will sell 20% of this business through the IPO. The remaining shares of the unit will be distributed to the shareholders of the parent company in a tax-free transaction.
Post-recession, General Electric has been steadily dismantling its real estate and home loans to strengthen the balance sheet of GE Capital. Ending net investment or ENI (excluding cash and cash equivalents) for GE Capital, a measure of its balance sheet, dropped to $380 billion at year-end 2013 from $556 billion in 2008. With the divestiture, General Electric anticipates to reduce it further to around $300 billion.
The new entity will operate as a standalone company valued at about $16 billion to $18 billion, competing with other players in the industry such as Discover Financial Services (DFS), American Express Co. (AXP) and Capital One Financial Corp. (COF).
Strategic Shift in Business
With the spin-off, General Electric intends to focus more on its industrial business. The company expects GE Capital profit to drop to $7 billion in 2014 and to $5 billion in 2015.
The gradual rebalancing of GE Capital’s debt portfolio has further reduced credit-default swaps tied to debt to 69.9 basis points – the lowest level since Jan 2008. As credit-default swaps typically decline with an improvement in investor confidence, it signifies that GE Capital is more creditworthy to derivative traders at present than it was before. This further offers a lucrative option to exit the market on a high.
Moving Forward
The spin-off will realign the corporate strategy of the company to a manufacturing-based entity with a diligent focus on big-ticket items such as medical equipment and scanners.
General Electric is one of the largest and the most diversified technology and financial services corporations in the world. With products and services ranging from aircraft engines, power generation, water processing, and security technology to medical imaging, business and consumer financing, media content, and industrial products, the company serves over 100 million customers worldwide. Its segments include Power & Water, Oil & Gas, Energy Management, Aviation, Healthcare, Transportation, Home & Business Solutions, and GE Capital.
General Electric currently has a Zacks Rank #4 (Sell).
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