GE plans credit card unit spinoff to shrink finance arm

Reuters

By Lewis Krauskopf and Ernest Scheyder

NORWALK, Conn., Nov 15 (Reuters) - General Electric Co will spin off its credit card business next year into aseparately traded company as it tries to reduce its exposure tounpredictable financial businesses and return to itsmanufacturing roots.

The new company should be worth roughly $16 billion to $18billion, bankers estimate, equal to about 6 percent of GE'soverall market value.

The initial public offering of roughly 20 percent of thecredit card business will help GE better focus on its industrialdivisions, which makes locomotives, jet engines, dishwashers andscores of other goods, executives said.

Since the financial crisis, GE's share performance haslagged rivals like Honeywell International Inc andUnited Technologies Corp,, which have much smallerfinancing arms.

At one time, the GE Capital unit, which houses the company'sfinancial operations, contributed nearly half of GE's totalprofit. But the unit's rising funding costs during the 2008financial crisis nearly sank the entire company, promptingexecutives to try to scale it down.

After the spinoff, GE Capital will help finance medicalequipment and other big-ticket items that the company produces.

The unit that GE is spinning off makes credit card loans toconsumers in North America. The cards are usually offeredthrough retailers like Pep Boys, La-Z-Boy Inc and Wal-Mart Stores Inc, and carry those retailersbrands.

The unit also makes personal loans to consumers to coverexpenses for things like vacations and medical procedures.

"This is the right business for GE to exit," said KeithSherin, head of GE Capital.

Asked why the spinoff did not include the international partof the retail finance business, Sherin said that would make thetransaction much more complicated.

GE, which has not yet named the company, will start thespinoff next year with the IPO. In 2015, GE will give itsshareholders the chance to swap GE stock for shares of the newbusiness.

It may also sell some part of the business to otherinvestors or companies, but it has tried and failed to sell itscredit card business before, sources have told Reuters.

Compensation for Immelt and other senior GE executives, whodo not have golden parachutes, is tied to how quickly they canshrink the company's financial portfolio, according toregulatory filings.

The spinoff is expected to reduce GE's total outstandingshares to about 9 billion to 9.5 billion from roughly 10.12billion today.

GE Capital was named a systemically risky financialinstitution last summer by the U.S. Financial StabilityOversight Council. The designation, commonly known as "Too BigTo Fail," in effect guaranteed more regulatory oversight of GECapital.

GE views the spinoff as its "last major action" in reducingprofit from its GE Capital unit to 30 percent of the overallcompany total, executives said in a presentation Friday. Theremaining profit comes from selling goods ranging fromlocomotives to jet engines to dishwashers.

GE shares rose nearly 1 percent to $27.25.

A BETTER TIME TO SPIN-OFF?

GE could not sell the business previously because very fewbanks are big enough to buy it, said Robert Hammer, the chiefexecutive of R.K. Hammer Investment Bankers, which brokers cardportfolio sales and has managed private label credit cardcompanies.

With losses on credit card loans declining across theindustry, the valuations for these businesses could rise, Hammeradded.

"This is a pretty good time to divest or spin off thebusiness," he said.

But GE executives acknowledged the economic recovery remainstepid.

"I hope the market conditions continue to be favorable forsomething like this" Sherin said after the presentation,speaking of the IPO.

One question that could affect the IPO valuation is how muchdebt it takes on and how the business finances itself in thefuture.

The GE spinoff comes as Spanish bank Santander' isgetting ready to spin off it U.S. auto lending arm, calledSantander Consumer USA. That offering is expected in the comingmonths and could indicate how much demand there is for GE'sbusiness, a banker said.

If the company's market capitalization were around $16billion, it would be smaller than credit card company DiscoverFinancial Services and larger than CIT Inc.

GE Capital, which includes all of the company's financialunits, posted revenue of $46 billion last year. Sherin expectsGE Capital's profit to dip in 2014 and 2015 as it divests theretail finance business, but to grow in line with its industrialbusinesses starting in 2016.

Proceeds from the IPO will be used to fund the new company,and Sherin said GE would focus next year on making sure it canoperate independently.

Sherin said GE had not yet determined whether it would needto add more cash to the new company beyond the IPO proceeds,noting the company would have to meet whatever the regulatorystandards are for capital requirements.

View Comments (3)