Last month a consortium of finance groups agreed to buy General Electric Capital’s consumer finance business in Australia and New Zealand at an enterprise value of $A8.2 billion (including debt).
Little did anyone know that less than a month later this sale in Australasia would be overtaken by the dramatic news that GE was to quit nearly all its finance operations around the world – a business that last year contributed 42% of GE’s 2014 profit of $US15.2 billion on sales of $US149 billion.
The move was revealed Friday night in the US by GE in an announcement that saw the company’s shares jump nearly 11% in the strongest rise since 2009.
Shareholders see enormous benefits for GE, especially by losing the designation of being a “systemically important financial institution” that US regulators have given it because of the systemic importance of the finance arm.
That will mean a reduction in the amount of capital GE has to hold for the finance arm to protect it in any crunch. Getting rid of that means lower costs and higher earnings.
The sale in Australasia was part of GE’s than staged move to reduce the company’s involvement in the high risk consumer finance business around the world. As a precursor, GE last year spun off Synchrony Financial, the US retail credit business that which raised $US2.8 billion.
Announcing the sale of the Australasian consumer finance assets Geoff Culbert, president and chief executive of GE Australia and New Zealand was quoted as saying. “This transaction allows us to focus on our strategy to be the world’s premier infrastructure technology company with a specialty commercial financial services business.”
GE Capital’s consumer lending business in Australia and New Zealand provides personal loans, credit cards and interest-free retail finance services. It has more than 3 million customers and is a partner to many retailers in the region, similar to Synchrony Financial.
At the time of that deal Jeff Immelt, GE chief executive, said he wants 25% or less of the group’s earnings to come from financial services, compared to 42% in 2014, and said the future size of GE Capital would depend on the returns the assets could generate.
He told investors in December: “We’re not in it just to be in it, we are in it to generate a good return.”
Well, after Friday night’s shock announcement, GE will no longer be in financial services (with one small exception) full stop. Mr Immelt’s initial slow moves to lessen the company’s involvement in financial services has become a full fledged sell-off between now and 2018.
GE said it planned to shed $US275 billion in GE Capital assets. That includes the Synchrony Financial credit card unit and the sale in Australasia, the sale of $US23 billion of real estate announced on Friday, and future sales of commercial lending and consumer banking businesses with assets of about $US165 billion.
The company plans to keep $US90 billion in finance assets directly related to selling its products such as jet engines, medical equipment and power generation and electrical grid gear – which is how the company’s finance operation started decades ago before being expanded by former CEOs, including the legendary Jack Welch.
Friday’s sharp share price rise underlined part of the reasoning behind the dramatic move. GE shares have fallen by around 30% since CEO Jeff Immelt replaced Jack Welch (the man who drove the plunge into finance) nearly 14 years ago, but the S&P 500 index has risen 95% in the same time.
That will now change as investors come to regard the company as less leveraged, with less risk and higher income over the next three years.
That in itself tells us why GE is doing this – investors have grown increasingly sceptical (and concerned) about the need for a financial services business that at one stage in the GFC threatened the entire company and saw it get $US3 billion in financial aid from Warren Buffets’s Berkshire Hathaway in 2008 in a $US12 billion issue to shareholders which helped assuage investor fears about GE’s stability.
By 2018, GE expects its industrial operations – which make everything from jet engines to X-ray machines – to generate 90% of profits.
The financial services sell-off is expected to release enough capital for the company to return up to $US90 billion to shareholders through a mix of $US50 billion in buybacks and the rest in higher dividends over the next three years. That should be enough boost the GE share price and improve its stockmarket rating.
