GE Plans Partial IPO of Consumer Finance Unit in 2014
General Electric Co. (GE) will finish shrinking its finance business by 2015 after spinning off the North American consumer lending unit, capping Chief Executive Officer Jeffrey Immelt’s effort to reduce credit risks.
As much as 20 percent of the unit will be sold in a 2014 initial public offering, GE Capital CEO Keith Sherin said today at an investor meeting in Norwalk, Connecticut. In a second step, the remaining shares will be distributed to GE stockholders in a tax-free transaction.
Divesting the business, whose products include store credit cards for companies such as Wal-Mart Stores Inc. (WMT) and J.C. Penney Co., bolsters Immelt’s bid to boost the share of earnings from units making industrial goods such as medical scanners. He has been slimming GE Capital since credit markets froze in the 2008-09 financial crisis, imperiling the parent company.
“GE isn’t reducing finance because it has a new religious attachment to industrial,” said Brian Langenberg, principal and director of research at Chicago-based Langenberg & Co. “This is about reducing the potential for future pain.”
The company has been chipping away at the finance unit by shedding real estate and home loans. GE Capital’s ending net investment, a measure of its balance sheet excluding non-interest-bearing liabilities and cash, slid to $418 billion last year from $556 billion in 2008. GE estimated it will fall as low as $300 billion with the consumer lending spinoff.
“This the final last step, the biggest step remaining in the transformation of the portfolio of GE Capital,” Sherin said at the investor meeting.
An IPO registration statement will be filed next quarter, and the transaction completed “later in 2014,” Fairfield, Connecticut-based GE said in a filing. Proceeds will remain with the new company to help it start as an independent lender, Sherin said. He declined to give a valuation for the business.
Peers of the new company include Discover Financial Services (DFS), American Express Co. and Capital One Financial Corp., Sherin said.
David Darst, an analyst at Guggenheim Securities LLC, estimated a valuation of $18 billion to $19 billion for the GE consumer lending business, based on $2.2 billion of annual net income and a price-earnings ratio of eight to nine times, or a little below those of Discover and Capital One.
“GE has relied more on their debt to fund the balance sheet,” Darst said in a telephone interview. “They do have deposits and CDs but we don’t know what the funding base would look like for the consumer unit. They are also oriented toward private-label accounts. There’s not as much of a relationship with consumers or the merchants.”
GE, the world’s largest maker of jet engines and locomotives, had been moving in the IPO direction for the unit for months, after Immelt signaled in May he was considering an initial offering for parts of it. Counting on a bank to buy financial-service assets would be “a fool’s errand,” making an IPO the likely outcome, he said at an investor conference.
Sherin said earnings for GE will be down a “little bit” in 2014 because of the IPO. Analysts had projected profit excluding some items of $1.79 a share next year, according to the average of 15 estimates compiled by Bloomberg.
Profit at GE’s industrial divisions will account for about 65 percent of operating earnings by 2015, the company said at a meeting with investors and analysts last year. Those earnings made up 55 percent of profit, on the same basis, in 2012.
GE expects a gain of $1 billion from the transaction to shed the retail finance business in 2015, based on the “excess value over our investment in the asset,” Chief Financial Officer Jeff Bornstein said, without providing details.
As GE Capital exits the North American consumer finance business and sheds some other assets, annual earnings at the unit will drop to $5 billion in 2015 from about $7.7 billion in 2013, Sherin said. That would make up about 30 percent of GE earnings and will begin to grow in 2016 in line with the company’s industrial businesses, he said.
The consumer finance unit is an “excellent business” that didn’t fit with the rest of GE, Sherin said. The timing of the transaction is good because capital markets are strong, he said.
“When we looked at the position we have in credit cards and we look at the synergies we get between our commercial lending businesses and the rest of GE, we just don’t see that,” Sherin said.
GE Capital was squeezed during the financial crisis that followed the September 2008 bankruptcy of Lehman Brothers Holdings Inc., forcing Immelt to reduce GE’s dividend for the first time since the Great Depression and tap government debt guarantee programs to contain the damage.
Standard & Poor’s and Moody’s Investors Service stripped GE of its top credit ratings and the stock plunged to a 16-year closing low of $6.66 in March 2009. As Immelt moved to shrink GE Capital, the unit’s ending net investment, a measure of its balance sheet excluding non-interest-bearing liabilities and cash, shrank 25 percent to $385 billion as of Sept. 30 since the start of 2009, according to a Nov. 1 filing.
Today, the cost to protect GE Capital’s debt from default for five years fell to the lowest level since January 2008, signaling the company is the most creditworthy it’s been since then in the eyes of derivatives traders.
Credit-default swaps tied to that debt, which typically decline as investor confidence improves, touched 69.9 basis points, the least intraday since Jan. 9, 2008, according to Bloomberg prices. The contracts climbed to 70.7 basis points today as of 4:28 p.m. in New York.
Credit swaps pay the buyer face value if a borrower fails to meet its obligations, less the value of the defaulted debt. A basis point equals $1,000 annually on a contract protecting $10 million of debt.
With the consumer finance business, GE is revisiting the strategy it used to divest its insurance unit through five stock offerings over a two-year span beginning in 2004 to accomplish that goal, capped by a final sale of Genworth Financial Inc. (GNW) shares in 2006.
In 2006, GE sold its GE Insurance Solutions reinsurance business for $7.4 billion to Swiss Reinsurance Co.
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