Just a few months ago, investors were convinced that General Electric (NYSE: GE) was on the rocks because of its heavy debt load. Last fall, the company slashed its quarterly dividend all the way to $0.01 per share and sold nearly a quarter of its shares in Baker Hughes, a GE Company (NYSE: BHGE) as part of an effort to calm the markets.
However, any reasonable doubt about GE's ability to repay its debts vanished on Monday. First, the company completed the merger of its transportation division with Westinghouse Air Brake Technologies (NYSE: WAB), generating immediate proceeds of $2.9 billion. Second, and even more importantly, GE announced a deal to sell its BioPharma business to Danaher (NYSE: DHR) for more than $21 billion.
Assessing GE's debt problem
General Electric ended 2018 with approximately $55 billion of industrial net debt. Last June, it set out a target of reducing that to $25 billion by the end of 2020. The company also needs to inject more cash into GE Capital to shore up that unit's balance sheet.
Last month, GE indicated that between its remaining shares of Baker Hughes, the proceeds of its transportation tie-up with Wabtec, and its plan to conduct an IPO of its healthcare business after transferring $18 billion of debt and pension liabilities to that subsidiary, there would be up to $50 billion to address its debt reduction needs.
The problem is that the healthcare segment contributes a substantial piece of GE's profit. Given that the GE Power business is currently losing money and burning lots of cash, even industrial net debt of $25 billion would be more than ideal for General Electric without the healthcare unit's steadying presence.
Losses at GE Power have added to the scrutiny of GE's balance sheet. Image source: General Electric.
GE Transportation and Wabtec link up
The GE-Wabtec deal completed on Monday will allow General Electric to make a little progress on its debt reduction plan. GE first confirmed that it would exit the transportation business last May. It is selling certain assets to Wabtec for $2.9 billion, and then merging the remainder of its transportation segment with Wabtec in an all-stock deal.
Based on updated deal terms released last month, Wabtec shareholders will own 50.8% of the combined company. GE will receive a 24.9% economic interest in the new Wabtec, while GE shareholders will receive the other 24.3% of the company.
General Electric is required to divest its entire stake in Wabtec over the next three years. Based on the stock's current value, which rose significantly after Wabtec's earnings report on Monday, this could bring in nearly $4 billion of additional cash before taxes.
Teeing up the biggest asset sale yet
All of General Electric's recent divestitures pale in comparison with the Danaher deal announced on Monday. Danaher will acquire GE Healthcare's BioPharma business -- which supplies tools used to develop and manufacture biopharmaceutical drugs -- for $21 billion in cash plus the assumption of about $400 million of pension liabilities.
This piece of GE's $20 billion healthcare segment is expected to bring in just $3.2 billion of revenue this year. However, it is growing quickly and produces very strong margins.
Taxes and separation costs will inevitably consume some of the proceeds of this asset sale. But GE is still likely to reap more than $15 billion that it can use to pay down debt. Between the recently completed GE Transportation divestiture and the BioPharma sale, which is set to close in the fourth quarter, GE should be able to reduce its net debt by at least $20 billion in 2019.
Image source: Getty Images.
GE has options
Closing the Danaher deal is now a top priority for GE. As a result, the previously planned GE Healthcare IPO has been postponed indefinitely. But that's OK -- it's not urgent anymore. The company now has more options for how to proceed with its deleveraging plan.
The combined value of GE's stakes in Baker Hughes and Wabtec is approximately $18 billion. The company could opt to sell those stakes quickly in order to reduce industrial net debt to $25 billion or less by sometime in 2020. In that scenario, it wouldn't ever need to sell or spin off the rest of the healthcare business, which currently generates $17 billion of revenue and roughly $2.5 billion of operating profit annually. Keeping that substantial profit stream would make it easy for GE to support industrial net debt of $25 billion.
Alternatively, General Electric could go ahead with a healthcare IPO in 2020 and delay selling the Baker Hughes and Wabtec stakes until those companies have had time to capture merger synergies -- and thus potentially become more valuable.
One thing is certain, though. The just-completed Wabtec transaction and the massive Danaher deal together will get GE most of the way to its net debt target. Between the remaining stakes in Wabtec and Baker Hughes and the potential for a future healthcare IPO, GE clearly has enough sources of cash at its disposal to handle whatever the future may bring. General Electric still has plenty of work left to fix its ailing power business, but at least investors can stop panicking about the company's debt.
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