GE exits health and oil as CEO aims to turn around ‘the titan’

Bloomberg

This is John Flannery’s General Electric Co. — and so far, Wall Street likes it.
A year after being named chief executive officer, Flannery took the boldest steps yet to revamp the sinking corporate titan, unveiling plans to pull GE out of the health-care and oil markets. By slimming it down and reorienting around power, renewable energy and aviation, he hopes to breathe new life into the 126-year-old company.
“We’re refashioning the company at every level,” Flannery said in an interview. “It’s fundamentally positioning the company for the future.”
The overhaul will profoundly reshape an icon of American business — albeit one that has fallen sharply from its Jack Welch-era heyday at the turn of the century. When Flannery’s done, GE will bear little resemblance to the conglomerate that once counted NBC, home-appliances, plastic, locomotives and a sprawling finance unit among its operations.
The new GE won an early embrace from investors. The shares surged 8.5 percent to $13.84 at 2:12 pm after advancing as much as 8.9 percent for the biggest
intraday gain in three years.
The announcement clears away lingering concerns over GE’s debt while laying out a plan to monetise several major assets, said Nicholas Heymann, an analyst with William Blair & Co. The moves will also help GE weather the storm in the gas-power market until it begins to improve in a few years, he said.
“It’s the escape from the Alamo,” he said. “You’re basically reconfiguring the company to bring forward the value-creati-on opportunities.” Still, as the Boston-based manufacturer str-uggles with cash flow issues and weak demand for equipment such as gas turbines, it’s far from recovered. GE fell 27 percent this year, following a 45 percent decline last year — a slump that led to GE’s removal this week from the Dow Jones Industrial Average after more than 100 years.
TRIAN APPLAUSE
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 by GE and believes that these initiatives will create substantial value for shareholders,” the fund led by investor Nelson Peltz said in an emailed statement.
GE will narrow its focus to power, renewable energy and jet engines, according to a company statement. It will spin off its medical-equipment business and sell its majority stake in oilfield supplier Baker Hughes.
“We have argued for the full breakup of GE and we pretty much have that – at least a realistic version of that,” Scott Davis, an analyst at Melius Research, said in a report. The health-care division is “a solid asset” and “what will remain at GE will largely be an aerospace business and a power business.”
GE plans to reduce net debt by about $25 billion by 2020. The 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 health care 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.”
But the dividend announcement may be a relief to some investors. The payout won’t disappear completely, and a potential cut will only happen in line with the move to spin off the health unit, Heymann said.