How Peltz's $2.5 Billion Investment Will Make GE Hurry Up

Peltz's Trian Takes 1% GE Stake to Pressure Change
  • Activist isn't seeking board seat -- but that may change
  • Financial-asset divestitures this year reach $97 billion

Jeffrey Immelt has been going all out to exit General Electric Co.’s financial businesses, once the center of predecessor Jack Welch’s empire. Now, with activist investor Nelson Peltz taking a $2.5 billion stake, Immelt has a good reason to pick up the pace even more.
 
Earlier this year, GE’s chief executive officer announced plans to shed $200 billion in credit and real estate assets in a tectonic shift back to the company’s industrial roots. So far, Immelt has jettisoned $97 billion. Peltz, who has a history of demanding change at his targets, may want to see GE keep going.

“Trian has not asked for a board seat but expects management to deliver on its commitments,” Peltz’s Trian Fund Management LP underlined in an 81-page white paper arguing its case for better shareholder returns at GE, titled “Transformation Underway...But Nobody Cares.”

With Trian’s 1 percent stake, GE may find its big new shareholder is impatient for change. Trian typically agitates for aggressive cost cutting and asset sales, and is an advocate of “zero-based budgeting,” where managers must justify all expenses. In his report, Peltz says he wants to see profit margins rise to 18 percent by 2018 from 14 percent currently.

And pushing for a board seat eventually isn’t out of the question. In nine of Trian’s past 10 campaigns it’s gotten or pursued directorships.

“Trian is being cordial with, and supportive of, Immelt right now,” said Ken Squire, who runs the 13D Activist Fund, which tracks targeted companies. “But they will not remain quiet indefinitely if performance does not improve.”

Largest Investment

Trian’s investment is the firm’s largest and makes it GE’s ninth-biggest shareholder, according to data compiled by Bloomberg. The New York-based fund said it met over the past few months with leaders of GE’s business units in a series of site visits before completing the investment. It said GE shares may reach $40 to $45 by the end of 2017.

“We invested in GE because it is undervalued and under-appreciated by the market despite what we believe is a transformation that will allow its world-class industrial businesses to drive attractive shareowner returns,” Peltz said in a statement.

Those returns haven’t been stellar recently. GE’s 56 percent gain in the five years ended Oct. 2 trailed the 70 percent advance for the Standard & Poor’s 500 Index. While GE’s 6.1 percent rally in 2015 to $26.82 outpaced the S&P’s 3.5 percent drop, most of that outperformance came from a rally Monday following the disclosure of Trian’s stake. GE also said it’s selling $2.5 billion of corporate-aircraft assets as the wind-down of the GE Capital finance arm continued.

Focus Areas

Peltz, 73, may push GE to move more quickly and on a larger scale for cost cutting and divesting non-financial assets, said Julian Mitchell, a Credit Suisse Group AG analyst. The Lighting unit or energy assets that aren’t meeting profit targets could be sold, Mitchell said in a note.

Acquisitions may be an area where Peltz seeks to influence GE, according to Nick Heymann, a William Blair & Co. analyst. Trian hinted at its interest in this area, too.

GE’s “track record has been mixed” on the $30 billion of acquisitions in the past five years, Trian said. While praising GE’s agreement to buy Alstom SA’s energy business, Trian said the company needs more discipline regarding what it buys.

GE got a reminder Monday of Trian’s persistence when it doesn’t get its way. Trian co-founder Ed Garden told CNBC the fund had purchased more shares of DuPont Co. and signaled that its fight to break up the chemical maker wasn’t over. Later in the day, DuPont announced the retirement of CEO Ellen Kullman, 59, who defeated a Trian proxy challenge in May, and cut the company’s profit forecast.

Watching Strategy

Trian said it has held talks with GE management since 2013 and believes “that the strategy of GE management and the board is broadly in line with our recommendations,” according to the firm’s statement. Trian urged GE to continue working “to expand operating margins, drive organic growth, increase capital efficiency and execute a disciplined capital allocation strategy.”

In his report, Peltz laid out his case for investing in GE. The main message is that the stock is undervalued considering changes that will have GE return $85 billion to shareholders through 2018, which is about a third of its current market value.

Peltz also touted his “longstanding relationship” with Immelt, who succeeded Welch in 2001. GE’s CEO, in turn, said in a statement that he welcomed the Trian investment and praised the firm’s record of working with companies to build long-term value.

‘Substantial Value’

“GE’s transformation is significant,” Trian said in its report. “We intend to work with management to help realize the substantial value in GE.”

Immelt, 59, decided to refocus GE on its industrial roots and shrink GE Capital after the 2008 credit crisis imperiled the parent company, forcing the first cut in the dividend since the Great Depression. After methodically selling off various lending assets in recent years, Immelt accelerated the process with the April 10 plan to retrench even further. His new emphasis was to just support GE’s own industrial goods, such as the financing commercial aircraft to sell more jet engines. 

Some of the proceeds from the GE Capital sales will go to the 8.5 billion-euro ($9.6 billion) acquisition of Alstom’s assets, giving GE a lock on many of the French competitor’s lucrative gas turbine servicing contracts. The deal was approved by European and U.S. regulators last month.

Before it's here, it's on the Bloomberg Terminal. LEARN MORE