GE breaks up to shave $25bn off the company’s net debt

Posted on 27 Jun 2018 by Jonny Williamson

General Electric has announced to spin off two of its largest divisions to simplify the company’s sprawling business structure and raise cash to strengthen the balance sheet.

GE has announced to spin off two of its largest divisions to simplify the company’s business structure. – image courtesy of IAEA Imagebank.

GE is to divest its healthcare division and stake in Baker Hughes, the oil services company.

The decision made by GE’s CEO John Flannery reflected the stark change in fortunes in GE, which has floundered since the financial crisis in 2008.

The moves are expected to shave $25bn off the company’s net debt and reduce its reliance on shorter-term financing such as commercial paper.

The plan to restructure GE include spinning off its train manufacturing business and $3.3bn sale of its distributed power division.

As reported by the New York Times, Flannery took a step in May toward his goal of making GE a ‘simpler, leaner’ company by spinning off its railroad business in a deal valued at roughly $11bn.

The railway business will be combined with the Wabtec Corporation, formerly known as the Westinghouse Air Brake Technologies Corporation.

On Monday (25June), GE unveiled a $3.25bn deal to sell its distributed power business, which makes gas engines that are used to generate electricity in remote places.

The latest divisions being spun off accounted for 30% of the group’s revenue and 25% of its industrial segment profit last year.

Shares in GE, which had fallen nearly 50% since Flannery took over, rose 7.8% to $13.74 on Tuesday in New York.

As reported by the FT, Flannery said on Tuesday: “Today marks an important milestone in GE’s history. We will continue to improve our operations and balance sheet as we make GE simpler and stronger.”

Since taking control in August, Flannery has devoted his efforts to scaling back GE’s broad conglomerate structure.

Under chief executive Jack Welch in the 1980s and 1990s it included businesses as diverse as insurance, entertainment and plastics.

Focus on three divisions 

As reported, GE will now confine its business to three divisions: equipment for the electricity industry, renewable energy, and aero engines and other aircraft parts.

Flannery has been working to give GE’s individual divisions more autonomy and cut corporate overheads. The spin-offs represent the culmination of his months-long strategic review.

GE is likely to cut its dividend after it completes the spin-off of the healthcare unit within the next 18 months, its executives said. The dividend was cut last year for only the second time since 1938.

As reported, the group has been struggling in recent years, hit by problems including a downturn in the market for gas-fired power plants and the slump in the oil industry that hurt Baker Hughes.