GE $126 Billion Asset Sales Set Up Too-Big-to-Fail Exitby
Bid to shed SIFI status to come in first quarter, Sherin says
GE Capital sees disposals `substantially done' by end of 2016
General Electric Co.’s sweeping plan to divest its U.S. finance operations neared completion Tuesday, putting the industrial giant on the verge of ending its status as a too-big-to-fail lender.
GE intends to apply in the first quarter to drop its federal designation as a systemically important financial institution, said Keith Sherin, chief executive officer of the GE Capital unit. A deal Tuesday with Wells Fargo & Co. to sell $32 billion in assets brings the agreed-upon disposals to $126 billion and leaves just one sizable U.S. division left to unload.
“That is a big step and a confidence booster for us,” Sherin said in a telephone interview. “We’ll be the first SIFI to apply to not be a SIFI. There is no established process. We thought it was very important to sell the U.S. assets and have that done as we’re applying.”
Shedding that label is both practical and symbolic. Besides removing GE from extra federal scrutiny, it would underscore the pullback from a finance business once so large it almost capsized the parent company during the financial crisis. The Wells Fargo sale puts GE about 60 percent of the way toward a goal of disposing of about $200 billion of assets as CEO Jeffrey Immelt refocuses the company on manufacturing.
“The SIFI de-designation is kind of the official capping of their challenged -- some might call precarious -- journey through the global recession and meltdown of GE Capital,” said Nicholas Heymann, a William Blair & Co. analyst who upgraded GE to outperform from market perform this week. “It’s a big deal because it gives them a lot more flexibility with regard to what they might want to do.”
The sale proceeds would give Immelt resources for more acquisitions or stock buybacks. Shorn of SIFI status, GE also would have less reason to maintain its AA+ credit rating from Standard & Poor’s. Immelt said in May he might sacrifice that grade while borrowing as much as $20 billion to support industrial expansion.
Immelt’s efforts to return to GE’s manufacturing roots gained additional urgency after Nelson Peltz’s activist investment firm Trian Fund Management LP disclosed a $2.5 billion stake in Fairfield, Connecticut-based GE this month. While supporting the GE Capital divestitures, Trian said it wants to see Immelt follow through on the plan and other efforts to boost margins.
GE announced its intent to shrink GE Capital in April after years of lagging behind benchmark U.S. stock indexes. Along with the retreat from lending, Immelt has unloaded consumer businesses such as the appliances division and re-emphasized products spanning jet engines, oilfield equipment and locomotives.
Now, GE will turn its attention to selling about $55 billion in international assets, including large operations in Europe and Japan, Sherin said. All of the businesses are in the market, and there are “active auctions going on in many countries,” he said.
The only significant U.S. platform left to sell is a franchise finance business with about $5.5 billion of assets, Sherin said. GE will apply to shed the SIFI label after closing the U.S. deals in the first quarter and completing a split-off of the North American retail finance operations now known as Synchrony Financial. Sherin said he expects the GE Capital pullback to be “substantially done” by the end of 2016.
GE Capital was one of four nonbank financial firms designated systemically important in 2013 by the Financial Stability Oversight Council, making it subject to Federal Reserve oversight. Without the GE Capital pullback, GE would be subject to additional regulatory requirements in coming years.
GE fell 0.8 percent to $27.87 at the close in New York. That pared the shares’ year-to-date gain to 10 percent, beating the 5.8 percent decline for the Standard & Poor’s 500 Industrials Index.
The Wells Fargo deal, projected to close in early 2016, includes GE Capital’s commercial distribution finance, vendor finance and corporate finance units, as well as about 3,000 employees. Toronto-Dominion Bank also bid for the businesses, while KKR & Co. and Apollo Global Management LLC sought portions of the assets, people familiar with the matter said in August.
Wells Fargo previously agreed to buy commercial real estate assets and GE’s railcar-leasing division.
GE plans to retain some lending units that support its manufacturing operations, including the GE Capital aircraft lessor known as Gecas. GE is scheduled to report third-quarter earnings on Friday.
In the deals already announced, GE is “a little ahead of our expectation on pricing,” Sherin said. “So far, so good.”