General Electric Co. plans to exit the bulk of its lending business, including a $26.5 billion sale of most of its real estate, as Chief Executive Officer Jeffrey Immelt refocuses the company on its industrial roots.
In the broadest restructuring since the GE Capital unit destabilized its parent during the 2008-09 financial crisis, GE plans to unload its middle-market lending business and consumer platforms while keeping only the operations that support its manufacturing arms. Potential buyers have made a “significant amount” of inquiries, GE Capital CEO Keith Sherin said.
The shares surged the most in almost five years on GE’s news, which included authorization of a stock buyback of as much as $50 billion. GE also said it’s working with U.S. regulators to get below the threshold to be designated a systemically important financial institution.
GE’s moves are an “overwhelming positive,” Steven Winoker, a Sanford C. Bernstein & Co. analyst who rates the shares as outperform, said in a note to clients. While Winoker said he was counting on GE to eventually divest more of GE Capital, “what we did not expect was the speed with which management would move to undertake this transformation.”
By 2018, “high-value industrials” will generate more than 90 percent of earnings, up from 58 percent last year, according to GE, whose product lines include jet engines, oilfield equipment and diesel locomotives. GE Capital will be formally merged into GE as part of the shift.
“The business model for large, wholesale-funded financial companies has changed, making it increasingly difficult to generate acceptable returns going forward,” GE said in a statement. GE said it would take after-tax charges of about $16 billion in 2015’s first quarter, with about $12 billion of that to be non-cash.
Immelt, 59, has been shrinking GE Capital since its access to credit dried up in the financial crisis, imperiling all of Fairfield, Connecticut-based GE.
His strategy: move away from finance and focus on industrial operations, the traditional heart of the company founded by Thomas Edison. Investors favor the perceived consistency of industrial earnings over financial, which can be volatile.
The new plan to shed most of GE Capital dwarfs previous piece-by-piece disposals, which included the sale of stakes in foreign banks and the initial public offering and planned spinoff for the North American consumer lending business. Immelt also has sold units such as the appliance operations on the grounds that they don’t fit GE’s industrial mission.
GE’s ending net investment in GE Capital -- a balance-sheet gauge that excludes non-interest-bearing liabilities and cash -- will fall to $90 billion from $363 billion as of Dec. 31 once the disposals are completed, the company said Friday.
Former CEO Jack Welch, an architect of GE’s tilt toward finance during a two-decade tenure that ended in 2001, expressed his approval Friday. “I like the package,” he said in a tweet. “It looks like a smart move and right for the changing financial landscape.”
GE jumped 8.7 percent, the most in intraday trading since May 2010, to $27.97 at 10:27 a.m. in New York. That eclipsed a year-to-date gain of only 1.8 percent through Thursday.
Credit default swaps tied to GE Capital dropped 17 basis points to 42.7 basis point at 9:37 a.m., according to data provider CMA, which is owned by McGraw Hill Financial Inc. and compiles prices quoted by dealers in the privately negotiated market.
The contracts, which investors use to hedge against losses on corporate debt or to speculate on a company’s financial stability, decline in price as investor confidence improves and rise as it deteriorates. During the crisis, the swaps had spiked above 1,000 basis points, a level usually associated with distressed companies.
GE Capital had a $499 billion loan portfolio at the end of 2014, making it one of the country’s largest non-bank financial companies. Its business lines span real estate, consumer and commercial lending, and aircraft and energy financing. GE will retain GE Capital Aviation Services, Energy Financial Services and Healthcare Equipment Finance. JPMorgan Chase & Co. provided financial advice.
GE Capital’s designation as a systemically important non-bank by the Financial Stability Oversight Council in July 2013 put the unit under Federal Reserve oversight.
Under the Dodd-Frank law, the Fed can impose tougher capital, leverage and liquidity requirements on SIFIs, and scrutinize them the way it would a large bank-holding company like Citigroup Inc. or JPMorgan Chase.
While GE Capital didn’t fight regulators on the designation in the wake of the financial crisis, most companies under consideration by the FSOC have tried to escape that tag.
GE has a “constructive relationship” with U.S. regulators, Immelt said in a statement. The council responded in a statement that it “welcomes the opportunity to consider any plans that, if implemented, address the potential risks to financial stability that resulted in a company’s designation.”
Moody’s Investors Service downgraded GE’s senior unsecured debt rating to A1 from Aa3 as a result of its GE Capital plan, saying the company is increasing its risk tolerance “in favor of equity holders and at the expense of creditors.”
Investors have supported Immelt’s acceleration of the business overhaul.
Immelt’s pace “is really picking up,” Jack De Gan, chief investment officer of Harbor Advisory Corp., which owns about $2.5 million in GE shares, said in an April 9 interview. “It appears that he’s realized that investors want this transition to get over more quickly than his original plan.”
The real estate transaction announced Friday is an agreement with Blackstone Group LP and Wells Fargo & Co. valued at about $23 billion, and GE said it’s in talks with buyers for other commercial property that will boost the value of the asset disposals to $26.5 billion.
After last year’s IPO, the rest of the North American consumer business, now known as Synchrony Financial, is supposed to be spun off to shareholders this year. GE has also sold real estate, including several floors of New York’s 30 Rockefeller Plaza building, where GE has offices.