GE exiting health, oil as CEO races to shrink flagging titan

By BLOOMBERG

NEW YORK • General Electric Co (GE) will exit the healthcare and oil markets as CEO John Flannery takes the most dramatic steps yet to pull the fallen corporate titan from a deepening crisis. The shares surged in early trading.

The future company will narrow its focus to power, renewable energy and jet engines, GE said in a statement yesterday. It will spin off its medical-equipment business and sell its majority stake in oilfield supplier Baker Hughes Inc.

The changes will profoundly reshape an icon of American business, which is mired in one of the worst slumps in its 126-year history amid flagging demand for industrial equipment, weak cash generation and an accounting investigation by US regulators. When Flannery’s done, GE will bear little resemblance to the conglomerate that once counted NBC, home-appliances, plastics and a sprawling finance unit among its holdings.

“We are making fundamental changes to position our businesses for the future and redefine GE for another century for success,” Flannery said on a conference call with investors and analysts. “This is a GE that’s equipped to fight for the future.” Investors gave a thumbs-up.

The shares jumped 7.4% to US$13.69 at 10:02am yesterday in New York after climbing as much as 8% for the biggest intraday gain in three years.

GE fell 27% this year through Monday, following a 45% decline last year — a slump that led overseers of the Dow Jones Industrial Average to kick GE out of the stock gauge it had been in for more than 100 years.

Trian Fund Management, which holds a stake in GE and has a seat on the board, said it welcomed the moves.

“Trian supports the strategic initiatives announced today by GE and believes that these initiatives will create substantial value for shareholders,” the fund led by Nelson Peltz said in an emailed statement yesterday.

GE plans to reduce net debt by about US$25 billion (RM100.67 billion) by 2020. The Boston-based company said it would maintain its dividend through the health spinoff.

After that, GE “expects to adjust the GE dividend with a target dividend policy in line with industrial peers”.

Payouts in healthcare are typically lower, so the combined dividend between GE and the spinoff will probably be less than current levels, Flannery said.

Investors have been bracing for a possible cut as GE’s condition has deteriorated. The CEO already reduced the payout in November, a painful blow to the many investors who have come to rely on the steady income.

“The dividend will likely be cut materially,” Steve Tusa, an analyst at JPMorgan Chase & Co, said in a note to clients.

“This is also ultimately a de facto equity raise and dividend cut when all is said and done.”

S&P Global Ratings put GE’s A rating on a ‘Negative’ credit watch, saying it expects to downgrade it one notch to four levels above junk when the health spinoff is completed.

Moody’s Investors Service reaffirmed its comparable A2 rating and said the moves were a positive step for GE’s credit.

GE said Larry Culp will take over as lead director. Culp, a former Danaher Corp CEO, joined the board earlier this year.

GE will sell 20% of the health business and spin off the rest to its shareholders tax-free.

GE plans to “materially shrink” the balance sheet of its finance arm, GE Capital, aiming to sell US$25 billion in energy and industrial finance assets by 2020.

The company also is exploring options to reduce its insurance exposure. GE shocked investors this year with a US$15 billion shortfall in insurance reserves.

The sale of the Baker Hughes stake—– to occur over the next two to three years — will end GE’s brief, rocky tenure in the oil and gas market.