General Electric Co. (GE) filed for an initial public offering of its North American consumer lending unit as part of Chief Executive Officer Jeffrey Immelt’s effort to reduce credit risks and focus on industrial businesses.
The spinoff of Synchrony Financial, as the unit is now called, will help Immelt reach a goal of reducing GE’s dependence on finance to 30 percent of earnings while GE Capital sheds a finance unit that’s not linked to products GE sells, including jet engines and gas turbines.
“When you look at this business they’re spinning off, there’s little justification for why they should be in that business in the first place,” said Gary Flam, a fund manager in Los Angeles with Bel Air Investment Advisors LLC, which owns 818,678 GE shares, according to data compiled by Bloomberg.
The IPO comes amid high demand for consumer finance companies, as the industry raised $10 billion through equity offerings last year, the most since before the 2008-2009 financial crisis.
U.S. consumer finance companies with more than $1 billion in market capitalization, including Visa Inc. and Western Union, currently trade at a median of 13.6 times earnings, data compiled by Bloomberg show. Synchrony, which earned $1.98 billion last year, would be valued at $27 billion if it fetched the same multiple.
GE has said as much as 20 percent of the unit will be spun off, and in a second step the remaining shares will be distributed to GE stockholders in a tax-free transaction. Today, GE said it expects to complete the IPO later this year. In a filing with the U.S. Securities and Exchange Commission, GE registered to sell $100 million of shares. That amount is a placeholder used to calculate fees and may change.
Immelt has been shrinking GE Capital since credit markets froze in the financial crisis, imperiling the parent company and forcing it to slash its dividend by more than two-thirds in 2009. He started by shedding real estate and home loans.
At the end of last year, GE Capital’s ending net investment, a measure of its balance sheet excluding non-interest-bearing liabilities and cash, slid to $380 billion from $556 billion in 2008. GE estimated in November it will fall as low as $300 billion following the consumer lending spin off.
Synchrony, whose products include store credit cards for companies such as Wal-Mart Stores Inc. and Amazon.com Inc., had total loan receivables of $57.3 billion at the end of December, GE said in today’s filing. The value of the unit ranges between $17 billion and $21 billion, Steve Winoker, a New York-based analyst with Sanford C. Bernstein & Co., wrote in a November note.
GE, based in Fairfield, Connecticut, said today it’s targeting completion of its exit through a split-off transaction in 2015. It may also decide to leave the business by selling or otherwise distributing or disposing of all or a portion of its remaining interest, it said.
GE rose 0.9 percent to $25.99 at 9:48 a.m. in New York. The shares had dropped 8.1 percent this year before today, compared with a 1.1 percent gain in the Standard & Poor’s 500 Index.
The sale is being managed by banks including Goldman Sachs Group Inc. and JPMorgan Chase & Co., the filing shows.
GE will apply to list the shares on the New York Stock Exchange under the symbol SYF.
Proceeds from the public offering will remain with the new company and be used to build out its infrastructure as it prepares for the final break from GE, the company said in November. The transaction will cause GE Capital’s profits to drop to $7 billion this year and to $5 billion in 2015, GE has said.
GE said it plans to make up for the spin off’s impact on earnings per share with cost cuts and efficiency gains at the industrial businesses as well as share buybacks.