GE Deal With Danaher Shows Culp Is All About the Balance Sheet

(Bloomberg Opinion) -- General Electric Co.’s latest deal shows that CEO Larry Culp is putting creditors in the driver’s seat, and shareholders can come along for the ride for now.

GE announced on Monday that it’s selling its biopharmaceutical business to Danaher Corp. for $21 billion in cash plus the assumption of $400 million in pension obligations. The deal has a bit of intrigue — Culp spent 13 years as Danaher’s CEO —  but it’s a huge step forward in his push to attack GE’s bloated balance sheet and reduce one of the largest unfunded pension balances in the S&P 500 Index. The biopharmaceutical business makes up the bulk of GE’s life-sciences operations, which were the most attractive part of the health-care division it had planned to take public. As such, Culp is putting those IPO plans on ice for now and will contemplate other options for its core imaging business. Taken together, it’s clear that GE’s creditors, rather than its stockholders, are Culp’s top priority. 

Recall that Danaher reportedly expressed interest in the life sciences operations in early 2018, but GE, led by John Flannery at the time, rebuffed its overtures. Flannery tried to juggle an obvious need to reduce GE’s leverage with an effort to conserve upside for aggrieved equity investors. Culp has torn up that blueprint to refocus the company’s divestiture drive on raising cash. Flannery was hesitant to pull the trigger on a wind-down of GE’s stake in the Baker Hughes energy business; Culp kick-started the sale just six weeks into his role as CEO. Flannery structured the merger of GE’s transportation unit with Wabtec Corp. to give GE shareholders a bigger stake in the combined entity than the company itself; Culp rejiggered that deal at the 11th hour to raise more cash to tend to the balance sheet. Flannery planned to spin off 80 percent of GE’s health-care business to shareholders; the life sciences deal with Danaher gives nothing to shareholders directly and it seems likely that any future divestiture of the remaining health-care operations will also be focused on raising cash, rather than providing shareholders with an ongoing interest. 

It’s a bitter pill, and GE’s decision to sell some of its better assets for cash speaks to the depth of the challenges it faces in its power unit and GE Capital financial arm. I don’t think Culp would be doing this if he thought GE could just muddle through another few years of power losses. Time is not on his side;  more than three-quarters of business economists expect the U.S. to enter a recession by the end of 2021, according to a semiannual National Association for Business Economics survey released Monday. A downturn is likely to undermine the aviation unit that has been GE’s primary savior throughout its recent struggles. The benefit of scrapping the health-care IPO for now is that GE gets to milk the cash flow from that business awhile longer. Notably, GE said it would at long last release its outlook for 2019 on March 14 and also booked a March 7 date for a presentation focused solely on its long-term care insurance liabilities. That suggests the additional detail on the insurance business that GE has promised to provide in its 10K annual filing is likely to be complicated and seemingly ugly.

While the balance between bond and equity holders is always tricky, I think Culp is doing the right thing by putting creditors first. These are hardly the actions of a company operating from a position of strength, but it’s the most logical path. And at this point, GE’s stock price is so contingent on what happens with the balance sheet that you could argue the interests of bond and equity holders are aligned for the time being. That’s why I have advocated in the past for an equity raise to put those leverage concerns to rest once and for all. The life-sciences deal and delayed divestiture of the remaining imaging business most likely mitigates any imminent need for a share sale. But you still have to wonder what GE is going to look like once Culp is finished and what its growth story will be. The health-care business was one of GE’s better cash-generating assets and, one way or another, it likely will be gone eventually. GE risks following the path of fallen industrial giants before it like Tyco International or Westinghouse and breaking itself up until it’s a shadow of its former self.   

To contact the editor responsible for this story: Daniel Niemi at dniemi1@bloomberg.net

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Brooke Sutherland is a Bloomberg Opinion columnist covering deals and industrial companies. She previously wrote an M&A column for Bloomberg News.

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