Even as General Electric Co. moves ahead with plans to pare down its once-sprawling industrial conglomerate, analysts are concerned that the pressing need to ease the company's debt burden may not happen as quickly as advertised.
GE is planning to separate 80% of its healthcare business through a tax-free split or spinoff over the next 12 to 18 months, with the remaining 20% to be monetized, the company said June 26. It is also planning to exit its 62.5% stake in oil and gas services provider Baker Hughes in two to three years.
"We are aggressively driving forward as an aviation, power and renewable energy company — three highly complementary businesses poised for future growth," GE Chief Executive John Flannery said in a statement.
The restructuring "marks the emergence of a new GE — a high-tech, industrial GE," Flannery added on a conference call following the announcement.
GE stock jumped about 4% on the news to open at $13.45, and it closed up nearly 7.8% at $13.74. The Boston-based conglomerate has a market cap of $119.3 billion.
A raft of deals
The latest announcement is part of an enterprise-wide strategic review Flannery embarked on after inheriting the top slot from Jeffrey Immelt in fall 2017. Back then, he announced that the company would cut its dividend and try to dispose of $20 billion in assets in order to address the company's debt load, which, at 4x EBITDA, was weighing on performance. The company is also contending with weakness in its power division and had to set aside $15 billion in reserves over seven years to cover insurance claims for its captive finance unit, GE Capital, and take a $6.2 billion charge for that business.
GE said June 26 that it would contribute $3 billion to GE Capital in 2019.
The day before it announced its restructuring plans, GE said it was selling its distributed power business to private equity firm Advent International Corp. for $3.25 billion. The company has also agreed to sell its healthcare IT business to Veritas Capital for $1.05 billion, its industrial solutions division to Swiss rival ABB for $2.6 billion, and said it would merge its transportation business with Wabtec Corp., an arrangement that is expected to generate $2.9 billion in cash.
With all that activity, GE is well on the way to its $20 billion divestiture goal. And Flannery said on the conference call that the dealmaking is expected to shrink GE's debt by $25 billion, bringing net debt-to-EBITDA down to 2.5x by 2020.
Hitting those targets, however, depends on the core businesses outperforming peers, as well as the GE Capital hangover being resolved in the parent company's favor, analysts said.
S&P Global Ratings maintained GE's "A" rating, while placing it on credit-watch negative, saying that the healthcare segment divestiture "leaves the company with less business diversity, earnings and cash flow and as such, potential for heightened volatility in profits and cash flow."
"However, debt reduction and substantial cash balances will reduce balance sheet risk," the rating agency said.
What about that dividend?
Moody's Investors Service also maintained its "A2" ratings and said its outlook remained negative, given expected weakness in earnings and cash flow through 2020.
Weakness in demand for gas turbines would weigh on GE's power business, its largest segment, Moody's said. The rating agency said it expected only "modest growth" for renewables.
And the prize aviation business, while highly profitable with margins over 24%, is still ramping up investment in its new engines, meaning it is still not generating "robust cash flow," Moody's said.
Though shareholders would end up owning 80% of the new healthcare company, GE plans to shift $18 billion in debt and pension obligations to its balance sheet as part of the parent's deleveraging plan. The move amounts to "a de facto equity raise and dividend cut when all is said and done," wrote JP Morgan analyst Stephen Tusa in a research note.
"None of this changes our sum-of-the-parts valuation," Tusa wrote, which he said was still "below where the stock is currently trading."
And though Flannery offered assurances that GE would maintain its 48-cent dividend through the healthcare unit spin-out, he said the boards of GE and the new company would "determine what is in line with peers" and that they "expect a smaller aggregate dividend at the GE level."
"Translation: the dividend will likely be cut materially," Tusa wrote.
This S&P Global Market Intelligence news article may contain information about credit ratings issued by S&P Global Ratings, a separately managed division of S&P Global. Descriptions in this news article were not prepared by S&P Global Ratings. The original S&P Global Ratings documents referred to in this news brief can be found here.