Introduction
Since Larry Culp took the helm, replacing John Flannery, as CEO of General Electric Co. (GE, Financial) in October 2018, many things have changed.
Let's take a brief look at what was achieved and announced in order to understand where we are with the deep restructuring process Culp and the board have been working on so far.
One of Culp's very first announcements on Oct. 30, 2018 was the reduction of the quarterly dividend to a penny from 12 cents per share.
On Feb. 25, 2019, GE announced its plans to sell its biopharma unit for $21.4 billion to Danaher Corp. (DHR, Financial).
On the same day, the industrial conglomerate announced the completion of the spinoff and subsequent merger of its transportation business with Wabtec Corp. (WAB, Financial). GE received $2.9 billion in cash and an interest in Wabtec representing about 25% of the company.
Then, on Aug. 29, 2019, GE agreed to sell PK AirFinance, a subsidiary of its broader aircraft-financing business Gecas (plus a related portfolio of loans), to Apollo Global Management (APO, Financial) and Athene Holding for more than $3.6 billion (the final price was not disclosed, but the company saidt it was greater than receivables book value).
Next came an announcement on Sept.12, 2019 regarding a tender offer to buy back up to $5 billion worth of its existing debt, which successfully closed on Sept. 26.
A few days later, on Sept 16, GE closed its sale of interest in oilfield services Baker Hughes (BHGE) for proceeds of about $3 billion, losing majority control of the company in the process. The company intends to sell the remaining stakes in Baker Hughes in an orderly manner over time.
On Oct. 7, GE announced multiple changes related to its U.S. Retirement benefits (one of them being the freeze of U.S. Pension Plans for approximately 20,000 employees) that will result in a reduction of GE's pension deficit by approximately $5 billion to $8 billion.
These deleveraging actions were necessary in order to right the ship and at the same time difficult to make (e.g., income investors were disappointed and selling businesses means losing some revenue streams), but I appreciate Culp's decisiveness and the way he transparently communicated everything with simplicity and honesty.
The biopharma deal is key to balance sheet de-risking
Of all the restructuring changes announced, the most important (and still needs to be finalized) is the biopharma deal.
Culp was undoubtedly helped in forging the deal by the fact he served as Danaher's CEO from 2001 trough 2014, where he more than quintupled the company's market value and revenue. No doubt he is still missed and loved there.
The deal was expected to close in the fourth quarter of 2019, but it was pushed back to the first quarter of 2020.
On Feb. 3, South Korea's Fair Trade Commission approved Danaher's proposed acquisition of GE's biopharma division on the condition that the company sells eight bioprocessing product assets to address monopoly concerns.
Moreover, Danaher won conditional approval from the European Union in December after agreeing to sell five businesses to placate competition concerns.
Even though not explicitly stated, the above-mentioned “monopoly concerns” could be the reason why the deal has not closed yet, but, as we can see, the company is addressing them as quickly as possible.
During the last conference call, Culp said, “We are on track to close BioPharma in the first quarter.” While the deal could potentially still shift to the second quarter or beyond, the risk of it not closing is close to zero.
The biopharma business, which is part of the life sciences division, had revenue of $5.2 billion (approximately 5.46% of total revenues) and generated approximately $1.3 billion in cash and $1.5 billion in profit in full fiscal 2019. The business' profit represents 14% of the total industrial segment profit. The price-Ebit ratio for the deal is around 14.
As we can see, GE is sacrificing a growing and healthy business, but de-risking is currently the top priority.
Following the close of the deal, Culp said GE will "execute on the previously announced 2020 deleveraging actions” using the funds generated from the sale.
Source: GE 2019 Q4 Earnings Call Presentation.
Of the $29 billion received, GE intends to spend around $23 billion in 2020, which will translate into $12.2 billion to repay the remaining intercompany loans from GE Capital, $4 billion to $5 billion will go into to the GE pension plan and $5 billion will be used to execute additional deleveraging actions.
While the company was already able to reduce industrial leverage (industrial net debt-Ebitda) from 4.8 times at the end of 2018 to 4.2 times in 2019, completing the biopharma deal will bring it closer to the long-term deleveraging target of less than 2.5 times at the end of 2020.
Conclusion
GE's de-risking and deleveraging efforts, including a long streak of multibillion-dollar deals and announcements, have been very timely and effective so far. The market and investment community clearly appreciated them and pushed the stock higher. Even though the close of the biopharma deal will reduce profits, it represents the crown jewel of Culp's deleveraging strategy. While it is only half of the story (restoring and growing the Power and other businesses being the other half), after the deal closes, GE will be a much safer company since it will not have to continuously worry about debt and liquidity and will finally be able fully focus on strengthening and growing its industrial businesses.
Note: In this article I intentionally only focused on GE´s balance sheet de-risking and deleveraging efforts and not on the industrial businesses' (Power, Aviation, Healthcare, etc.) restructuring and growth-related actions. These will be addressed in a separate article.
Disclosure: Long General Electric (GE, Financial).
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