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Delayed departure

10 March 2021 By John Foley

General Electric’s light-bulb moment is still far off. That will be the day boss Larry Culp – or whoever runs the company by then – can say that the former conglomerate now does just one thing: make complex, expensive machinery for business customers. Culp’s new plan to merge $34 billion of leased aircraft assets into a joint venture with Ireland’s AerCap brings the moment a little bit closer.

The deal with AerCap, if approved by antitrust watchdogs, will get plane leasing off GE’s balance sheet, but it’s not a clean break. GE will hold just under half of the enlarged AerCap, a stake worth around $6 billion. It will also take a $3 billion loss. Indirectly, the company will still be exposed to AerCap’s sizable borrowings, too. GE will have two board seats, but its voting power will be less than its 46% economic stake, according to a person familiar with the situation.

Then again, GE doesn’t really do clean breaks. It took the company three years to sell its actual light-bulb business. In 2018 it said it would sell down its stake in oil services company Baker Hughes – a process now due to reach a conclusion around 2023. In this case, the slow burn may be a good thing. Airlines are in distress because of Covid-19 travel curbs, and selling near the bottom isn’t a good look.

GE hasn’t always been transparent, so it’s important that it does what it says it’s doing. A recent settlement with the Securities and Exchange Commission outlined how GE failed to tell investors how it was massaging its cash flows and hid the underfunded state of its old-age insurance business. Culp hasn’t quite learned the art of plain speaking: GE will get $24 billion of cash from AerCap, but after shuffling its debts, the industrial core business will end up with just $1 billion more cash than it had at the end of 2020.

At the same time, GE announced a reverse stock split – swapping every eight shares investors hold for one new one. That should catapult the share price back to a level they haven’t seen since 2000, but with no actual economic change. That has echoes of the old GE, with its focus on gestures. Fortunately, a smart investor knows the difference between appearance and reality.

 

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