Private Equity Buyers Keen to Split General Electric

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General Electric’s decision to split into three companies paved the way for a feeding frenzy among private equity buyers looking to slice the industrial conglomerate into pieces, according to people from several large private equity groups.

“I suspect that everyone will be buying from the GE Store over the next two years,” said the head of a large multinational buyout firm, referring to the “GE Store” slogan coined by former chief executive Jeff Immelt. “I think there’s going to be a whole bunch of really attractive things that will be sold.”

Larry Culp, CEO of GE, announced last Tuesday the decision to split the company into separate companies focused on healthcare, energy and aviation. The split, he said, would give each GE company the freedom to define their own strategy.

It was the latest in a wave of corporate restructurings that include IBM’s abandonment of its technology services business and planned spin-offs to Japan’s Toshiba and US healthcare firm Johnson & Johnson.

The split is expected to be completed in 2024, when GE will join United Technologies, DowDuPont, ABB and Siemens to abandon the conglomerate structure.

GE on Tuesday announced the split of its healthcare business, which generates more than $ 17 billion in annual sales and sells MRI and ultrasound machines.

It will create its combined renewable energy and power divisions, which contain units that do everything from manufacturing gas turbines to managing nuclear facilities, hydroelectric dams and offshore wind farms.

It will leave ownership of an aviation company that manufactures jet engines and also holds long-term care insurance liabilities to shareholders.

The company has sold policies covering assisted living and retirement home stays as part of its financial services division GE Capital, which is in the process of being unwound. The policies, like many of GE’s financial inroads, have cost the company billions.

But the long term of Culp’s plan will offer interested buyers the opportunity to withdraw assets from GE, which has a market cap of $ 118 billion. “It will take them forever to create health care in 2023 and power in 2024,” said the executive, who said Culp’s announcement “removes some of the possible sales friction.”

GE’s avionics business, which manufactures navigation systems for commercial and military aircraft, and its GE Unison division, which manufactures electrical equipment for aircraft, are particularly attractive units.

“We are sharpening the pencils,” added another executive at a large global alternative asset manager. “I think anything other than health care may be able to sell for a better price in the private market than when it goes public.”

This framework provided for the possibility of private equity buyers attempting to purchase GE’s jet engine business. “The properly capitalized jet engine business is an incredible business,” he said. However, some analysts have questioned whether the size of this unit with $ 22 billion in annual revenue and its value would put it out of the reach of financial buyers.

GE’s biggest business is energy, with $ 33 billion in revenue in 2020, and could be sold piecemeal. “Any business in the energy portfolio is considered non-core. They would be perfect candidates for private equity, ”said Deane Dray, analyst at RBC Capital Markets.

Added to a private equity executive: “There would definitely be some big companies to buy. ”

The unit, built through acquisitions such as French electricity giant Alstom, has low margins and CreditSights analysts predict it will generate just $ 1.3 billion in combined operating cash flow this year in what one buyout framework called a “hodge-podge of isolated companies.”

The energy spin-off companies include energy assets such as gas turbines and steam power plants, and its renewable energy portfolio, which includes the manufacture of onshore and offshore wind turbines, wind blades, storage systems and a portfolio of high voltage energy transformer networks. and circuit breakers, among dozens of companies.

Other areas of opportunity include GE’s 45% stake in AerCap, a publicly traded company, which it owns after the $ 34 billion sale of its aircraft leasing business, GECAS, closes this month. -this. “I think it would be a good investment,” said one of the takeover officials. “It’s something that is probably executable. They have a ton of debt to pay off, so they’re going to sell it, ”he predicted.

Analysts also pointed to potential financial buyers for GE’s biggest headache, its long-term care insurance business, which is expected to receive a total infusion of $ 15 billion to handle future claims.

“They have to get rid of the insurance. There’s no way they can put that above the aviation business, ”said Nigel Coe, analyst at Wolfe Research.

“If your view is that these assets are more than enough to cover the liabilities, then the deal is basically just a handshake and you take the keys and walk away,” added Scott Davis, analyst. at Melius Research.

GE declined to comment on future sales.

A flurry of private equity operations to complete the dismantling of GE would effectively mark the end of one era of financial management and the advent of another. Already, private equity buyers such as Blackstone and Advent International have bought large companies from GE. Former senior executives like Steve Bolze and John Krenicki have also turned to the buyout industry, joining Blackstone and Clayton, Dubilier & Rice respectively. Former CEO Jeff Immelt is a venture capital partner at NEA.

Alternative asset management giants like Apollo, Blackstone, Brookfield, Carlyle and KKR are growing just as powerful as GE was at its peak, but they are capitalizing and managing portfolio companies independently. Remote operations do not subsidize each other and have independent boards and business strategies. They are in many ways the opposite of a conglomerate, where centralized management builds a diverse empire of assets to smooth out economic and geographic volatility.

“It’s an era,” said a private equity partner who called GE’s disruption the “death knell” of the conglomerate’s business strategy, where management is responsible for allocating cash to many disparate companies. .

“If a single C-suite could actually do this, the Soviet Union probably wouldn’t have collapsed. “

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