By Thomas Gryta
Investors in General Electric Co. waited a year to hear Chief
Executive John Flannery's turnaround strategy. They will have to
hold out longer to learn how GE intends to solve perhaps its
biggest problem: GE Capital.
GE Capital wasn't central to the plans unveiled last month to
restructure the company around its power and aviation businesses.
The lending unit, which once financed things including oil-drilling
ships and overseas car loans, previously accounted for as much as
half of GE's profit and helped fund its dividend. Then the
financial crisis hit, and GE Capital nearly sank the entire
company.
Former CEO Jeff Immelt sold most of the assets late in his
career, but some of the less-desired pieces continue to be a drag,
including a $15 billion commitment to an insurance business that
caught even board members and senior executives by surprise.
In mapping out GE's future structure, Mr. Flannery and his team
also grappled with what to do with GE Capital. The company
continues to work with bankers and advisers to shed pieces of the
business, devise a way to reduce or neutralize remaining risk, or,
ideally, separate the entire operation, according to people close
to the process.
GE said last month that it expects to put $3 billion in cash
into GE Capital in 2019, although several analysts warn that the
size of that contribution could grow.
"They've taken great pains in exiting a lot of GE Capital and
de-risking, " said Stifel analyst Robert McCarthy. "That said, we
continue to get nasty surprises."
As investors consider the risk and reward around GE shares,
which are down almost 50% in the past year, it is difficult to be
comfortable with the shadow of GE Capital and the potential for new
large financial obligations, Mr. McCarthy said. GE could face more
questions about its plans for the finance unit when the company
reports earnings later this week.
Despite years of shrinking, GE Capital still has about $146
billion in assets, including a large airplane-leasing business, a
defunct subprime mortgage operation and more than $3 billion in a
collection of variable-rate Polish residential mortgages.
The size of the liabilities and uncertainty around some pieces
means that GE might have to pay someone to shed the business.
Mr. Flannery asserts that he is now comfortable that there are
no more looming surprises akin to the insurance shortfall,
prompting JPMorgan analyst Steve Tusa, a longtime bear on GE's
stock, to question the idea of paying money to eliminate
liabilities if there aren't further risks.
"They are working on ringfencing insurance, but we don't
understand why this is necessary if appropriately capitalized," he
wrote to investors recently. "A resolution of a neutral item that
requires cash or value transfer is negative."
GE Capital was launched last century to help consumers pay for
appliances. Former Chief Executive Jack Welch led its growth, and
assets had ballooned to $661 billion when credit markets seized up
during the financial crisis in late 2008.
GE is now essentially unwinding much of the entire operation,
with plans to sell $25 billion in energy and industrial finance
assets by 2020.
The potential separation of GE Capital is complicated by talks
with the Justice Department to settle claims the GE unit violated
the law with some of its lending practices leading up to the
financial crisis.
In a separation, GE's industrial divisions likely would have a
financial-services function, a tool that can be helpful in closing
sales of their massive machines that can cost hundreds of millions
of dollars. Competitors such as Siemens AG and United Technologies
Corp. have financial-services organizations that play that
role.
While the finance function is helpful, similar to getting a loan
from a car dealer, customers aren't necessarily getting better
terms than they would from a third-party institution, one
industrial executive said. But bundling the lending in-house gives
buyers the impression they are getting a good deal, the person
said.
The other significant pieces in GE Capital are its insurance
obligations and its airplane-leasing business. Mr. Flannery has
made it clear that he is looking at all options to neutralize the
insurance obligations, and executives have long referred to the
plane business, known as GE Capital Aviation Services, or GECAS, as
a "jewel" that could easily be sold.
GECAS owns almost 2,000 aircraft and leases them to airlines,
cargo companies and others, and is known on Wall Street for its
expertise in managing the life of an airplane. The business has
about $41 billion in assets, according to Moody's, and it accounted
for more than half of GE Capital's $9.1 billion in revenue last
year.
Mr. Flannery has said there are no "sacred cows" in his
restructuring of GE; he already has announced plans to shed the
health-care business he ran until last year.
"It has significant value. We're approached on that business all
the time," he said about GECAS in June. He added that the $3
billion cash injection into GE Capital next year will address the
needed capital levels in the operation.
"But the big picture strategy is continue to shrink," he
said.
--Ted Mann contributed to this article.
Write to Thomas Gryta at thomas.gryta@wsj.com
(END) Dow Jones Newswires
July 17, 2018 05:44 ET (09:44 GMT)
Copyright (c) 2018 Dow Jones & Company, Inc.
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