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Nelson Peltz's Trian takes $2.5 billion stake in General Electric

By Lewis Krauskopf

(Reuters) - Activist investor Nelson Peltz's fund has bought a $2.5 billion stake in General Electric Co, adding fresh pressure on the U.S. conglomerate to pull off its plan to shift away from finance operations toward its industrial roots.

Shares of Dow industrials component GE rose 4.5 percent to $26.60 on Monday after Peltz's Trian Fund Management disclosed its roughly 1-percent stake, and said the stock could be worth $40 to $45 per share by the end of 2017.

Trian, which said its biggest-ever investment also makes it a top-10 GE shareholder, said it wanted GE to cut costs to expand operating margins, explore more share buybacks including by taking on new debt, be disciplined in its acquisitions and consider ways to further scale back GE Capital.

But Trian said it would not seek a board seat, backing the "transformation" already under way at GE. Peltz said Chief Executive Jeff Immelt and GE "share much common ground with Trian."

Immelt, in a statement, welcomed Trian's investment.

"All it does is act as a further catalyst to make sure GE stays on track with the plans they have in place,” said Charlie Smith, chief investment officer at Fort Pitt Capital Group, which owns about 1.2 million GE shares.

Peltz, Smith said, is a "sharp operator. We’re glad to see him in the picture."

With Monday's jump, GE's market capitalization rose to about $268 billion, trailing only a few companies, such as Apple, Microsoft, ExxonMobil and Wells Fargo & Co.

In recent years, Peltz has targeted DuPont and PepsiCo Inc, among others, demanding board seats and asking for separation of fast-growing businesses from stagnating ones. He is also known to work closely with management teams, showing more patience than some activist peers.

Peltz, who launched Trian in 2005, is one of the largest U.S. activist investors, with $12 billion in assets under management and callable commitments.

Activist investors typically buy shares of an undervalued company and push for management or structural improvements, stock buybacks or divestitures, among other things. Last year, activists targeted 347 U.S. companies, a 58-percent increase from 2010, according to FactSet, with this year on pace to eclipse that total.

In an 81-page report on GE entitled "Transformation Underway ... But Nobody Cares," Trian pointed to GE's "stagnant" share price, with total shareholder returns climbing only 10 percent in the past decade, trailing industrial peers, with the stock hurt by the company's dependence on its finance arm.

GE stunned Wall Street on April 10 when it said it would seek to unload some $200 billion of GE Capital's assets, so it generates 90 percent of profits from industrial operations by 2018, from 55 percent in 2013. GE shares popped nearly 11 percent that day, but gave up much of those gains in recent months.

Trian began accumulating its GE stake in mid-May, Trian spokeswoman Anne Tarbell said.

Trian chief investment officer Ed Garden told CNBC television, "there's a ton of investor skepticism in GE," but Trian sees "eye-to-eye with management on the plan."

"I think they’ll execute," Garden said. "If they don’t, then all options are on the table."

While GE plans to return $90 billion to shareholders, Garden said that could rise to $110 billion or $120 billion, "depending on how you capitalize the industrial business going forward."

Trian's cost-cutting emphasis also comes as GE has already set targets for improving gross margins and lowering selling and overhead costs.

"It is not clear that Trian is suggesting a whole lot that is different to the plan being executed by GE management," Morgan Stanley analyst Nigel Coe said in a research note.

Peltz addressed roughly 100 GE executives in August 2013 and since then Trian has had several discussions with GE management about its corporate structure and improving shareholder returns, Trian said.

GE said Monday it was on track to complete $100 billion in GE Capital asset sales this year and achieve its raised industrial operating earnings forecast for 2015.

"Trian has a strong track record of working with companies to build long-term shareholder value and has been an engaged shareholder," Immelt said in a statement.

(Reporting by Lewis Krauskopf and Michael Flaherty in New York, Supriya Kurane, Amrutha Gayathri and Ankit Ajmera in Bengaluru; editing by Kirti Pandey and Nick Zieminski)