General Electric Announces Plan To Separate Into Three Independent Publicly Traded Companies

Deal Overview

On November 9, 2021, General Electric (NYSE: GE GE , $93.13, Market Capitalization: $102.3 billion) announced its plan to form three investment-grade, industry-leading, global public companies focused on the growth sectors of aviation, healthcare, and energy. GE intends to execute a tax-free spin-off of the Healthcare business in early 2023, creating a pure-play company at the center of precision health and expects to retain a 19.9% stake in SpinCo. This will be followed by combining GE Renewable Energy REGI , GE Power, and GE Digital into one business and then pursuing a tax-free spin-off in early 2024. Following these transactions, GE would operate as a leading aviation-focused company. The separation will result in three global, industry leading companies with distinct business characteristics, capital structure, and investment profiles. The proposed spin-offs of Healthcare (SpinCo 1) and the Renewable Energy and Power (SpinCo 2) business are intended to be tax free for GE and GE shareholders for US federal income tax purposes. The company expects to incur one-time separation, transition, and operational costs of ~$2 billion and tax costs of less than $0.5 billion, depending on the specifics of the transaction. Moreover, incremental annual costs of $150 -$200 million are expected for each of the two spin offs initially, which is likely to reduce over time. The company and its businesses will continue to serve GE’s partners and customers throughout this transition.

Each spin-off is subject to the satisfaction of customary conditions, including final approvals by GE’s Board of Directors, private letter rulings from the Internal Revenue Service and/or tax opinions from counsel, the filing and effectiveness of Form 10 registration statements with the US Securities and Exchange Commission, and satisfactory completion of financing. Transactions are not subject to bondholder consent. GE intends to execute the spin-offs of healthcare in early 2023 and the Renewable Energy and Power business in early 2024. GE Chairman and CEO H. Lawrence Culp, Jr. will serve as non-executive chairman of the GE Healthcare company upon its spin-off. He will continue to serve as chairman and CEO of GE until the second spin-off (Renewable Energy and Power business), and then will lead the GE aviation-focused company (RemainCo) going forward. Peter Arduini will assume the role of President and CEO of GE Healthcare effective January 1, 2022. Scott Strazik will be the CEO of the combined Renewable Energy, Power, and Digital business, while John Slattery will continue as CEO of Aviation business. The respective capital structures, brands, and leadership teams for each independent company will be determined and announced later. Paul, Weiss, Rifkind, Wharton & Garrison LLP is serving as lead legal counsel. Evercore EVR and PJT Partners PJT are the lead financial advisors to GE on the transaction. Additionally, GE has also received legal advice from Gibson, Dunn & Crutcher LLP, and financial advice from BofA Securities and Goldman Sachs GS .

The separation announcement broadly received positive reception from most Wall Street analysts and the stock popped 2.6% on 11/9. However, the stock has declined 16.3% since the day of the announcement, as investors fear regarding Covid-19’s impact on travel was amplified by the spread of the Omicron variant. Moreover, substantial one-time costs and the spin-off completion timeline (early 2023 and 2024 completion) could create near term pressure on GE stock due to disruptions in the year of transition (2022).

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Deal Rationale

GE’s proposed split into three publicly traded companies is similar to the break-up of other large, diversified companies. The transaction is expected to create value for the shareholders by reducing the conglomerate discount on the GE share. Earlier in 2018, since the company was facing multiple crises, including trouble at its financial services division and power business, GE brought in H. Lawrence Culp, Jr. as the Company’s CEO, who had previously reshaped Danaher Corp DHR . He swiftly stabilized and turned around GE by selling major businesses to cut GE’s bloated debt, including the sale of the bulk of the GE Capital finance arm, pushing operational fixes to bolster cash flow and profits at its industrial divisions, and cutting the dividend to a token penny a share. It is worth noting that GE is on track to reduce debt by more than $75 billion by the end of 2021 compared to 2018 and is now on track to bring its Net Debt to EBITDA ratio to less than 2.5x in 2023. GE will use proceeds from the recently closed GE Capital Aviation Services (GECAS) transaction (~$30 billion) to significantly reduce debt in the near future and remains committed to continued debt reduction along with strategic capital deployment. The company has also taken decisive action to derisk itself by stabilizing insurance, mitigating funding risks with the capital contributions to date and focusing on operational improvements, such as its investment portfolio realignment strategy. Moreover, GE has maintained strong liquidity and better cash management, driving lower, more predictable cash needs by eliminating on-book factoring and discontinuing the remaining off-book factoring program of ~$2 billion. GE is expected to continue to drive operating improvements for sustainable profitable growth, and the company now expects to achieve high-single-digit free cash flow margins in 2023. Resultantly, the company is in a strong position to execute this plan to form three well-capitalized, investment-grade companies.

Upon separation, each company will have the strategic focus, nimbler organizational & operating model, and financial flexibility to deliver innovative customer solutions and drive long-term value. The three independent companies will be appropriately capitalized with the financial flexibility to take advantage of future growth opportunities. The separation will provide each company the ability to tailor its capital structure and its capital allocation decisions to its particular business model. As part of that capital allocation independence, each company will be able to pursue its growth strategies through M&A, supported by their independent equity currencies. Each business will also have the opportunity to attract a distinct shareowner base aligned to its growth profile and capital allocation priorities, more appropriately aligned management, and employee incentives, all of which we believe will lead to a stronger business and create greater value over the long term. Moreover, each independent company is expected to have a strong balance sheet and maintain an investment-grade credit rating. Post-separation, healthcare will be a strong global precision health franchise focused on innovation-driven growth. Similarly, Renewable Energy and Power Company will be the world’s most diverse energy franchise focusing on operational performance and innovative breakthrough technologies to provide power while reducing emissions. Notably, GE (RemainCo) will become a more focused, simpler, stronger aviation franchise winning in growing aerospace & defense markets. With 37,000+ commercial engines (60% haven’t seen their second shop visit) and 26,000+ military engines, GE Aviation is well-positioned to support its customers through the upcycle. Furthermore, the company will retain other assets and liabilities of GE today, including run-off insurance operations. Upon closing the Healthcare transaction, GE expects to retain a stake of 19.9% in the healthcare company to provide capital allocation flexibility. GE also intends that healthcare will issue debt securities, the proceeds of which will be used to pay down outstanding GE debt. GE’s stakes in AerCap, Baker Hughes BHI , and the (post-split) GE Healthcare will give the company the financial flexibility to ensure that its renewable energy and power business can also have an investment-grade capital structure when they are spun off.

Company Description

General Electric (GE) (Parent)

Headquartered in Boston, General Electric is a global high-tech industrial company that operates worldwide through its four industrial segments viz. Power, Renewable Energy, Aviation and Healthcare. The Power segment offers technologies, solutions, and services related to energy production, including gas and steam turbines, generators, and power generation services. The Renewable Energy segment provides wind turbine platforms, hardware and software, offshore wind turbines, solutions, products and services to the hydropower industry, blades for onshore and offshore wind turbines, and high voltage equipment. The Aviation segment provides jet engines and turboprops for commercial airframes, maintenance, component repair, and overhaul services, as well as replacement parts, additive machines and materials, and engineering services. The Healthcare segment provides essential healthcare technologies to developed and emerging markets and has expertise in medical imaging, digital solutions, patient monitoring and diagnostics, drug discovery, and performance improvement solutions that are the building blocks of precision health. The company serves customers in over 170 countries. Its manufacturing and service operations are carried out at 82 manufacturing plants located in 28 states in the USA and Puerto Rico and at 149 manufacturing plants located in 34 other countries. The company reported consolidated revenues of $79.6 billion in FY20.

GE Healthcare (Spin-Off 1)

GE Healthcare provides essential healthcare technologies to developed and emerging markets and has expertise in medical imaging, digital solutions, patient monitoring, and diagnostics, drug discovery, and performance improvement solutions that are the building blocks of precision health. Products and services are sold worldwide, primarily to hospitals and medical facilities. The Healthcare segment recorded sales of ~$18.0 billion in FY20. Post-separation, GE Healthcare will be a strong global precision health franchise focused on innovation-driven growth. With 4 million installations worldwide serving more than 1 billion patients in executing more than 2 billion procedures per year, GE is at the nexus of most care pathways. The demand is expected to be robust, supported by powerful secular growth drivers. In the long-term, through the cycle, the company anticipates market growth of mid-single digits with operating margins in the high teens to 20% while converting more than 100% of free cash flow.

GE Renewable Energy & Power (Spin-Off 2)

Post-separation, the new company will include Renewable Energy, Power, and Digital businesses. This business possesses a unique offering with the world’s most powerful wind turbines and most efficient gas turbines, as well as technology to modernize and digitize the grid. The energy transition represents the largest market opportunity for Digital with vertical market solutions in Grid and Power Generation. Digital, now a $1 billion business with over 40% recurring revenue, is focused on improving profitability. Renewable Energy & Power segments recorded sales of ~$33.3 billion in FY20. With an installed capacity of 400+ gigawatts of renewable energy and 7,000+ gas turbines, the company is providing ~1/3 of the world’s electricity together with its customers. In the longer term, through the cycle, the company expects market growth of low-single-digits with operating margins in the mid-to high-single-digit range while converting 80% to 90% of free cash flow.

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