Diversified conglomerate General Electric Company GE is reportedly adding final touches to a massive divestment plan to focus more on its core industrial businesses. Although the company spokespersons have denied commenting on the grapevine, speculations are rife that the official announcement could be made public as soon as later today.
According to insiders aware of the proceedings, General Electric is likely to sell its real estate assets across the globe to a consortium led by private equity firm Blackstone and Wells Fargo & Company WFC. The transaction valued at approximately $30 billion is arguably the biggest blockbuster commercial real asset deal in recent times since the acquisition of Equity Office Properties Trust by Blackstone in 2007 for $39 billion.
The divested portfolio of over 4,400 properties includes warehouses, factories, malls, apartment buildings and other commercial properties of General Electric. The real estate assets accounted for about 7% of the aggregate GE Capital assets worth $499 billion at year-end 2014. The strategic divestment by Chief Executive Jeff Immelt was primarily influenced by his decision to focus on core industrial businesses to shield the parent company from intense market volatilities that plagued the market during the 2008-09 financial crisis. The decision might also have been triggered by the Federal Reserve’s decision to raise interest rates later this year, thereby pushing up the financing costs.
The transaction will realign the corporate strategy of the company to a manufacturing-based entity with emphasis on big-ticket items such as engines, generators, medical equipment and scanners. General Electric spun off its North American consumer lending unit in an initial public offering (IPO) in the end of July last year as the first concrete step to shrink its finance business. The company is also actively pursuing the sale of GE Money Bank AB (Nordics) consumer finance business to Spain’s Banco Santander, S.A. In addition, General Electric is further planning to divest its ownership stake in Polish Bank BPH SA. The company is successfully seeking approvals for closing the acquisition of the Power and Grid business of French conglomerate Alstom. With these restructuring initiatives, General Electric expects operating earnings from the industrial business to aggregate 75% of its total operating earnings by 2016.
The core industrial operations of the company are expected to increase profit by at least 10% this year through state-of-the-art technology and stringent cost-cutting measures. The asset sale is also likely to rake in $4.5 billion to $4.75 billion in cash, based on historical debt ratios for real estate investments and an expected deal premium, as estimated by an industry analyst.
Furthermore, the transaction will strengthen General Electric’s long-serving business relationship with Blackstone. The privately-held equity firm had earlier bought apartment properties in the U.S. and Japan and office buildings in Australia in order to increase its global real estate investments. Industry sources reveal that Blackstone has raised $14.5 billion to invest in commercial properties across the world.
The divestment buzz propelled share prices by 2.9% to close at $25.73 as on Apr 9, 2015. Over the last one-year period, General Electric has performed relatively weaker in comparison to the overall S&P 500 with an average return of 0.6% compared to 14.1% for the benchmark index. Investors had long been expecting such radical moves by the company to pull up the sagging share prices. Whether the latest move is ‘a right step in the right direction’ or ‘too little too late’ can only be judged in the due course of time. In the meantime, what we can surely say is that the market is waiting in anticipation for a seemingly game-changing decision by the company.
General Electric currently has a Zacks Rank #4 (Sell). Other notable companies in the industry include Icahn Enterprises, L.P. IEP and Compass Diversified Holdings CODI, both carrying a Zacks Rank #2 (Buy).
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