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GE to shed finance arm in major shake-up

General Electric’s appliance unit has already been sold.
General Electric’s appliance unit has already been sold.Jim Young/Reuters file

NEW YORK — General Electric plans to sell off most of its finance arm in the next two years, redefining the multinational conglomerate as it seeks to complete a transformation begun in the tumult of the financial crisis.

In addition to huge planned sales of assets outlined by the company Friday, GE will take other significant steps, including bringing back about $36 billion in cash that now resides overseas.

Rapidly shrinking the finance unit, GE Capital — once the most powerful driver of the firm's earnings until it rocked the company after the fall of Lehman Bros. in 2008 — will erase one of the most prominent legacies of GE's former chief executive, Jack Welch.

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But it could also release the company from one of its biggest burdens: strict regulatory requirements that come with GE Capital's being regarded as a financial institution that is too big to fail.

GE's plan is that by 2018, its core industrial businesses — including jet turbines, heavy energy equipment, and sophisticated medical devices — will account for about 90 percent of earnings, up from 58 percent last year.

It will also buy back up to $50 billion of its shares, a move to further rejuvenate what has been a largely stagnant stock price.

To Jeffrey R. Immelt, the company's chairman and CEO, corporate legacy has not deterred him from a plan to shrink a huge and sometimes unwieldy collection of businesses. The conglomerate has already sold divisions, including its small appliances unit, that became too tiny to affect sales, which were $148 billion last year.

"We're not sentimentalists," he said in an interview.

Such a drastic downsizing is no small matter for GE, whose empire spans 175 countries and employs some 305,000 people.

"Jeffrey Immelt will have truly remade the company," said Steven Winoker, an analyst at Bernstein Research. "This is a massive strategic reallocation of capital and investment."

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The ambitious plan will begin with the sale of most of GE Capital's real estate assets to the Blackstone Group, with other assets going to Wells Fargo and other buyers. All told, the real estate deals are valued at $26.5 billion.

All that will remain by the end of the sales process are any financing businesses closely tied to the conglomerate's core industrial businesses.

GE estimates that those remaining assets will be valued around $90 billion, a fraction of the $363 billion of GE Capital assets held as of year-end.

For much of its 123-year history, GE has had a finance division, although the business has traditionally served as a support for its parent's manufacturing arms. Under Welch, however, GE Capital swelled in size and willingness to take on risk, becoming one of the most prominent lenders in the country.

For years, the financial tilt looked smart and relatively easy. Yet the big bet on finance badly wounded GE in the wake of Lehman's demise, when the market upheaval left the conglomerate hard-pressed to borrow debt for its day-to-day operations.

In addition to announcing its reorganization, the company revealed Friday it will pay about $6 billion in taxes on earnings it brings back from overseas. Many US corporations continue to hold huge sums of money overseas, hoping for a change to US tax laws. But GE said it had chosen to move quickly.

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Since the financial crisis, GE has taken steps to shrink its finance operation, selling off smaller pieces over the years. In one of its most notable moves, it spun off its private-label credit card arm — now known as Synchrony Financial — in a $2.9 billion initial public offering last year.

Still, Immelt said, the company focused on moving carefully, its board mindful "not to burn stuff out" at fire-sale prices.

But the success of Synchrony — its stock has risen 30 percent since it began trading — helped prod Immelt and his team, including advisers at JPMorgan Chase and Centerview Partners, to consider moving more quickly.

At the same time, Immelt said in the interview, GE's mainstay industrial operations are performing well.

Now is a "perfect time to be a seller," he said. Moreover, he added of potential asset buyers, "people are lining up at the starting line."

First up came a potential sale of GE Capital's real estate assets. As GE's management team and advisers weighed potential partners, one name quickly came to mind: Blackstone and its huge real estate arm.

"We thought there was only one buyer who can do this: Jon Gray at Blackstone," Sherin of GE Capital said. "We told him, 'If you can hit this bid on an exclusive basis, it's yours.'"

Despite not putting the real estate assets up for a competitive auction, which may have fetched a higher price, Sherin declared himself happy with the result. Moving this way assured GE of both a speedy and certain transaction.

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"Both parties think they got a fair price," he said.

General Electric said it would remain an acquirer of businesses as well, although its deals would be aimed at bolstering industrial operations. Last year, it paid $13.5 billion for the energy operations of the French industrial company Alstom.

Selling the bulk of GE Capital could bring significant benefits for GE shareholders, by the company's reckoning. It estimates that it could return more than $90 billion to investors by 2018, through special dividends, the stock buyback and other financial moves. About $35 billion of that alone will come from the GE Capital asset sales.

Perhaps one of the most notable potential consequences of the drastic move is that GE will be able to shed its designation as a "systemically important financial institution." Such status comes with high requirements to keep capital on hand, potentially limiting its financial returns.

So significant is the label that MetLife, the insurer, has sued regulators to try to remove the designation.

"We're probably the most heavily regulated company in the world," Immelt said. But he added, "Regulation doesn't scare us."

The conglomerate has already begun discussions with government regulators, although it is hoping to formally apply for the removal of the so-called Sifi designation next year.

The Financial Stability Oversight Council, which determines which institutions receive the designation, said in a statement: "The council welcomes the opportunity to consider any plans that, if implemented, address the potential risks to financial stability that resulted in a company's designation. The council has a process to evaluate changes at a designated company and consider whether to rescind its designation. Consistent with the Dodd-Frank Act and the council's procedures, the council annually re-evaluates all previously designated nonbank financial companies."

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