Last year, General Electric (NYSE: GE) CEO John Flannery told investors that the company would sell about $20 billion of assets by mid-late 2019. It has already agreed to several major divestitures since this target was announced.
In this episode of Industry Focus: Energy, the team looks at the biggest deal announced so far: the hybrid sale and spinoff of GE Transportation to Wabtec. There are plenty of other divestitures on the table going forward, including a potential sale of General Electric's controlling stake in Baker Hughes, a GE Company.
A full transcript follows the video.
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This video was recorded on May 31, 2018.
Sarah Priestley: We've seen the asset sale news in the media recently. I think the one thing that GE will need to do in order to overcome a lot of their current issues is to actually get out of the regular financial media. What are the headlines that we're seeing around GE Transportation, and what does that mean for the company?
Adam Levine-Weinberg: The most recent deal that GE announced was a divestiture of its Transportation division, which mainly builds freight locomotives. It's a very profitable division historically and generates lots of cash flow, but it's still pretty small relative to GE today. It's also in the midst of a cyclical downturn, which has been a problem in the past year or so.
Under the terms of this deal, GE is going to sell about $2.9 billion of its assets to Wabtec, which is a Westinghouse spin-off, for $2.9 billion in cash. Then, the rest of GE Transportation will merge with Wabtec. At the end of these maneuvers, the Wabtec shareholders will end up with 49.9% of the combined company. GE shareholders will have 40.2%. And then, GE itself will own 9.9% of the new Wabtec. Then, GE is required to sell that 9.9% stake within three years. So, ultimately, that will convert into cash. Depending on how Wabtec shares trade over the next couple of years, that will probably be around $2 billion of additional asset sale proceeds.
The 50.1% that GE and its shareholders will own at the beginning of this deal is currently valued at more than $9 billion, based on Wabtec's recent share price. So, including the cash component, the total deal value is actually more than $12 billion, which was quite a bit higher than what most analysts had been expecting. That's mainly because GE was taking a patient approach. Rather than trying to sell the entire business for cash to the highest bidder, it was willing to take this half-sale, half-merger deal with Wabtec that means it won't cash out as quickly, but it maximized the amount of value that GE shareholders are going to get. It's also going to minimize taxes for GE and for GE shareholders, which is obviously important, too.
Priestley: Yeah. They'd owned that business for maybe 100 years, was it?
Levine-Weinberg: Yeah, more than a century.
Priestley: The tax implications will presumably be pretty high. I think this is such a smart move by Flannery, because he's essentially being strong-armed into selling a lot of these assets while they're in a downturn. This is a way that he can game that system and get some liquidity out of them right now while also shoring up some future returns.
Levine-Weinberg: Yes. Just to run through some of the other deals that GE has announced recently, it's planning to sell its industrial solutions unit to ABB. That's supposed to close within the next month or two and bring in $2.6 billion of proceeds. It sold off its Healthcare IT unit to a private equity firm for a little over $1 billion. That deal is supposed to close next quarter. It's marketing its Distributed Power operations, which includes the Jenbacher and Waukesha brands. Analysts have estimated that could be worth $3 billion and more. GE's Lighting division is also for sale. Obviously, lighting has become commoditized, so that's not going to bring in a lot of money, but again, it will help with making the company more focused on its main operating divisions.
Then, the last and biggest one is that GE eventually plans to divest its 62.5% in Baker Hughes. It acquired this stake not even two years ago. That's currently worth about $25 billion because of the recent surge in oil prices across the globe. But, again, this is part of the GE strategy. It doesn't want to be in these commodity businesses, where changes in oil prices are going to dictate profits. Assuming that oil prices stay high for the next couple years, this actually could be a pretty good time to get out of that business, while people are willing to pay more for it.
Adam Levine-Weinberg owns shares of General Electric. Sarah Priestley owns shares of General Electric. The Motley Fool owns shares of and recommends Westinghouse Air Brake Technologies. The Motley Fool has a disclosure policy.