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Sunday, 21 September 2014

Jeff not Jack

GE finally puts Jack Welch era out to pasture

General Electric is finally putting former Chief Executive Jack Welch’s ghost out to pasture. On Friday the conglomerate said it intends to spin off its North America retail finance business. That will help return GE Capital to its roots lending to mid-market companies and its parent’s industrial concerns.

Current CEO Jeff Immelt will take his time offloading the division, which houses private-label credit cards, healthcare and veterinary finance and some consumer loans. First, GE Capital intends to sell about a fifth of the business through an initial public offering next year, using the proceeds to build up the unit’s capital as a standalone company. It’ll then spin off the rest to GE shareholders in 2015.

The move will hit earnings. The consumer finance business is expected to contribute $2.2 billion to the bottom line this year, according to GE – 13 percent of the conglomerate’s net income as forecast by analysts. GE Capital expects to have to cut costs, be more efficient with its balance sheet and grab new business to keep the return on tangible common equity at last quarter’s annualized level of 15 percent.

The benefits, though, should shine through. First, earnings per share won’t fall too much, if at all, as the planned 2015 exchange of stock in the new company for outstanding GE shares will reduce the GE share count. Without the volatile consumer business, earnings should be steadier, and GE Capital’s share of overall earnings will shrink to about 30 percent. Moreover, the finance-related divisions that will remain are better aligned with the company’s industrial units.

The more GE focuses on those core businesses, the more likely it is that investors will value the company as an industrial powerhouse rather than applying a discount for the businesses in the financial sector, which commands a much lower multiple. That should mean a boost for shareholders.

GE Capital can do more still: even after the spinoff, almost a quarter of its leases will remain consumer-related. And its real-estate portfolio remains a drag, though things are improving. It has taken Immelt 12 years to get to this point. But at least he’s finally ending the mission creep that started under Welch.

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Context News

GE Capital on Nov. 15 announced that it intends to spin off its North America consumer finance unit. The business includes private-label credit cards, veterinary and healthcare finance and personal loans for purposes including vacations.

All in, the businesses to be sold account for $53 billion of receivables and should bring in $2.2 billion of net income this year, according to General Electric, GE Capital’s parent.

GE Capital plans to sell up to 20 percent of the business in an initial public offering next year and will use the proceeds to help build capital for the standalone business. GE Capital would then spin off the remaining 80 percent of the business in 2015, potentially by exchanging its stake for GE shares held by GE stockholders who elect to participate in the exchange.

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