Culp Plots GE's Next Act as Deal Closing Unlocks Possibilities
(Bloomberg) -- General Electric Co. CEO Larry Culp is about to close his biggest deal yet. And to hear him tell it, he’s just getting started.
The company’s $30 billion sale of its aircraft-leasing business to Ireland’s AerCap Holdings NV closes on Monday, fueling another wave of debt payoffs that Culp has made a hallmark of his three years as chief executive officer. That will enable GE to once again consider moves that have been all but unthinkable so far on Culp’s watch: boosting GE’s minuscule dividend, buying back shares, making acquisitions, or shedding a once-toxic book of nearly $40 billion in insurance liabilities.
“We are positioning the board to have the opportunity to spend more time on capital allocation decisions,” Culp said in an interview after the company reported third-quarter earnings. “Whether it be a dividend, whether it be buybacks, or whether it be M&A, those are not topics this board has necessarily had the luxury of spending a lot of time on over the last several years.”
Culp declined to say which of those actions GE might consider first. Any of them would mark a shift beyond the priorities that have thus far dominated his efforts to pull GE from an epic stock collapse that wiped out $200 billion in market value.
He’s sold major businesses to cut GE’s bloated debt, made operational fixes to bolster cash flow and profits at its industrial divisions and mitigated the Boston-based company’s risks. GE showed signs of progress on Tuesday when it announced a third-quarter profit and cash flow that topped Wall Street expectations, and raised its full-year earnings forecast.
“We really are in a position where we’re going to be able to play more offense,” Culp said.
Multiple Asset Sales
Culp stressed that “playing offense” first means growing GE’s existing businesses that make jet engines, power equipment and imaging machines for hospitals. And debt reduction remains GE’s top priority for allocating its cash. To wit, GE will to use proceeds from the AerCap deal to step up debt reduction since 2018 from roughly $49 billion today to $75 billion.
Yet Culp’s history at Danaher Corp., where he revamped the company with $28 billion worth of deals, suggests he’s unlikely to stop there. He dazzled Wall Street with outsized returns and a steady cadence of deals to reshape the business from a dowdy maker of industrial products and Sears Craftsman tools to a health-care and life-science equipment and services provider. He did it with a dispassionate view of the company’s holdings, telling an investor conference in 2010 that “no Danaher business has a permanent place in the portfolio.”
Culp has applied a similar philosophy at GE. In one of his first moves as CEO, he cut GE’s prized dividend to a token penny a share. Two years ago, he agreed to sell off GE’s bio-pharmaceutical business to his former employer for $21.4 billion, shelving an earlier plan to spin off the broader health-care division. And in March, GE announced Culp’s largest deal to date: combining GE Capital Aviation Services with AerCap, parting with what’s been the jewel in GE Capital’s otherwise tarnished crown.
GE will erase GE Capital from its financial reports after that deal closes, and fold what’s left into its corporate balance sheet. Among the remnants is the insurance unit carrying $37.7 billion in liabilities as of the end of September. The business primarily backs long-term care policies that cover costs such as nursing home care and other cost associated with aging, which have been a big drain as Americans live longer and health care costs continue to rise.
The insurance portfolio has cast a long shadow over GE. It prompted a $6.2 billion charge in 2018, plus another $15 billion over several years to cover a shortfall in reserves after years of deterioration with little warning to investors. It also drew the attention of U.S. securities regulators in a probe of accounting issues at the company, which GE agreed to pay $200 million to settle last year.
Jettisoning the insurance unit would be a “momentous” step toward eliminating risks that have spooked some investors for years, said RBC Capital Markets analyst Deane Dray.
“It would’ve been euphoric a couple of years ago but it just wasn’t going to happen back then,” he said. “It would remove another one of these nagging overhangs on the stock, if it were to be eliminated at a reasonable price.”
It would also achieve what Culp’s two most recent predecessors couldn’t: all but eliminating what remains of GE Capital, a big source of the company’s financial woes over the past decade.
Dray said GE could use some of the $24 billion in cash from the AerCap deal to attract a buyer for the insurance unit.
“If some new cash is coming in the door, what’s the best use of those proceeds? At a minimum, it should be part of the dialogue,” he said.
Still, the once-volatile insurance operation has stabilized. It passed annual stress tests in each of the last two years and generated a tidy profit of $360 million in the first nine months of 2021.
That steadier performance, plus looming interest-rate hikes that may lift returns on the portfolio’s assets, could help GE secure a deal to part with the unit for good -- even if it has to pay someone to do it, said William Blair analyst Nick Heymann. He said the likelihood of a divestiture will grow once the aircraft lessor sale closes.
“This is a boat that can float and everybody thinks it’s a concrete boat with no bottom,” he said in an interview.
Culp has long signaled his openness to a deal to unload the business, but he tempered expectations that will materialize soon.
“We don’t need to be in the long-term care business any longer,” Culp said. “It’s a more attractive asset than it was, but in terms of the potential timing for a transaction, I can’t say, so I won’t.”
Industrial manufacturer ITT Inc. in July agreed to sell a unit holding long-term asbestos liabilities to an affiliate of private equity firm Warburg Pincus Capital Corp., kicking in nearly $400 million as part of the deal. While not directly related to GE’s situation, it’s a similar liability-management issue and “an important data point” when considering GE’s options for its long-term care holdings and “the pricing seemed attractive,” said Melius Research analyst Scott Davis.
“It seems very likely that a deal could be had in this environment, and I think Larry would welcome the opportunity to further simplify GE,” he said.
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