It’s the largest deal that Larry Culp has engineered so far as chief executive at General Electric. But that’s not necessarily what will make the $30-billion-plus divestiture of GE’s aircraft leasing business, known as GECAS, so important for the Boston-based company.
Finally, Culp can wave goodbye to GE Capital. GE will become a pure industrial play for investors, one without the often-arcane financial services businesses attached.
With a simpler, more focused structure, Culp said in an interview, GE can get closer to playing offense, instead of constantly playing defense.
First, let’s take a closer look at this “transformational” deal, as Culp calls it, that GE unveiled on Wednesday. Top Irish rival AerCap Holdings would take control of GE Capital Aviation Services by paying GE $24 billion in cash, issuing a chunk of AerCap shares to GE currently valued at $6 billion, and handing over $1 billion in AerCap notes or cash upon the deal’s anticipated closing nine to 12 months from now. The 400-plus employees of GECAS, many of them based in Connecticut or Ireland, would move over to AerCap, along with the fleet.
The deal would leave GE with a 46 percent stake in AerCap. Why? The airline industry is suffering right now. GE is divesting GECAS at a roughly $3 billion discount to the value of its net assets. By holding shares in AerCap, GE can participate in the likely upside as the Irish company gets a liftoff from a jet-travel rebound. GE can sell off those AerCap shares gradually, as their value rises.
Culp said he has been holding discussions about divesting GECAS for the past two years, with a “host of people.” Among them: Gus Kelly, the chief executive at AerCap. The two have had a running conversation, almost since Culp became CEO 2½ years ago.
With GECAS on someone else’s books, GE Capital will be small enough to be folded into corporate operations, for accounting purposes. The aircraft leasing business generated the bulk of GE Capital’s $7 billion in revenue last year. Left behind as GECAS jets away are GE’s legacy insurance operations, and a financing arm for energy deals. Analyst Nick Heymann, with investment bank William Blair & Co., is among those who believe the long-term care insurance operations, a perennial headache for GE, could be next to go now that rising interest rates make them more desirable.
This GE Capital exit dates back to Jeff Immelt’s time as CEO. His predecessor, Jack Welch, famously bulked up the financial operations, in part to help GE meet its quarterly numbers. By the time of the Great Recession, GE was one of the largest financial companies in the country. It also flirted with disaster as a result. GE Capital had become GE’s Pandora’s Box, Heymann said.
Immelt describes how he sweated through this time in his new book, “Hot Seat.” GE Capital eventually rebounded. But Immelt still wanted to separate finance from industrials. Thus came “Project Hubble,” the initiative launched in 2015 to sell off GE Capital in parts. The company’s credit card business became Synchrony, and GE unloaded commercial real estate worth billions of dollars.
Now, it’s Culp’s turn to essentially finish the job.
So what does Wall Street think? Investors sent GE shares upward on Monday after word leaked to The Wall Street Journal that a GECAS-AerCap deal was in the offing. But on Wednesday, with the details spelled out, investors weren’t so sure: Shares fell 5 percent to close at $13.25. The stock had been trading at nearly three-year highs, but still far from GE’s $60 peak in 2000.
It’s hard to know exactly what drove the stock down on Wednesday. The GECAS announcement coincided with a previously scheduled investor presentation. Among the bits of news: GE’s earnings guidance came in below the average Wall Street forecast for 2021. Some questioned the divestiture’s timing, with air travel still in the doldrums, and the discounted sale price. S&P Global warned it could downgrade GE’s credit rating, citing high debt leverage after the deal closes. Oh, and then there was this surprise: GE is planning a reverse stock split that would convert every eight shares into one.
There’s also some uncertainty tied to pending government antitrust reviews, given the market share strength of the two companies. But Jeff Windau, analyst at investment firm Edward Jones, said he still likes the deal: The announcement, like Culp’s sale of the biopharma business last year, will be crucial to paring down GE’s mountainous debt pile. GE plans to use the GECAS deal proceeds and existing cash sources to significantly reduce its debt by about $30 billion.
Becoming a “better capitalized GE,” as Culp puts it, is one way to help GE focus on its industrial businesses: power, renewable energy, aviation, and health care. Fix the balance sheet, Culp said, and GE’s board can finally start thinking about the fun stuff again: a normal dividend, stock buybacks, acquisitions. Get to that point, and GE’s weary investors might agree with Culp that this deal could transform the company’s future.