GE's Asset Sale Starts With a Single, the First of Many
(Bloomberg Gadfly) -- The first significant General Electric Co. divestiture under CEO John Flannery is here, and it's a bit underwhelming.
GE announced on Monday that it was selling a bundle of health-care information-technology businesses to private equity firm Veritas Capital for $1.05 billion in cash. This divestiture makes sense: GE has struggled to make its mark in a crowded market for health-care workforce management and billing software, so investors won't miss this business. The fact that Veritas is paying cash really should be underscored in a bright color in light of continuing fears about a liquidity crunch at GE and the risk of a credit-rating downgrade.
But it's telling that the current manager of GE's health-care IT businesses (which make up its "value-based care division") cites the opportunity to tap Veritas's "resources" to refresh the product portfolio and pursue acquisitions. The takeaway for me is this business is better positioned to grow outside of GE than within. There's little flexibility for investment or M&A within the company's businesses right now. This $1 billion asset sale isn't going to change that. Most of the proceeds from GE's divestitures will most likely go straight to its balance sheet. And while every dollar counts, this is just a drop in the bucket.
GE shares continued their slide after the announcement and were down about 3 percent as of 2 p.m. in New York. Part of Monday's decline may be a realization that the spike of more than 6 percent over two days last week on an entirely unsubstantiated rumor that Warren Buffett might take a stake in the company was unfounded. This piecemeal divestiture could also be interpreted as a sign of things to come, signaling that the bigger portfolio moves some GE investors had been counting on could in fact be more muted.
It has been almost five months since GE's overhyped investor day, when Flannery provided early details for his plan to divest more than $20 billion of assets. His garage sale was uninspiring and included GE's lighting unit -- long rumored to be on the block -- and the industrial-solutions operations -- an electrical-products business that former CEO Jeff Immelt earmarked for disposal in 2016 and that the company agreed to sell to ABB Ltd. in September 2017.
Flannery also said he would look at options for unwinding GE's 62.5 percent stake in the merger of its energy business with Baker Hughes and in January expressed a willingness to look at Baker Hughes-like publicly traded structures for other big GE divisions. But since then GE has taken a slightly different tack. CFO Jamie Miller said in February that GE wouldn't make any changes to its Baker Hughes holdings until a lockup period expires in 2019.
GE is most likely still looking at options for its locomotives division, which has about $4 billion in revenue. But the universe of buyers for that deeply cyclical business is limited, as Karen Ubelhart of Bloomberg Intelligence has noted. Some of the more logical suitors are Chinese companies, and their ability to complete a deal may be in question as President Donald Trump's administration seeks to crack down on the country's ability to do acquisitions in the U.S. Either way, the bulk of Flannery's simplification strategy could wind up consisting of a series of small carve-outs from within GE's main business divisions, along the lines of this health-care IT divestiture.
I think few strategic reasons remain to bind GE's various businesses together. But I'm willing to acknowledge there may be a financial logic to holding onto all the cash flow the company can and avoiding the disynergies that may come from dividing up pension expenses and other costs. JPMorgan Chase & Co. analyst Steve Tusa estimates GE will lose $1.5 billion to $2 billion of free cash flow through its targeted $20 billion in asset sales, dragging the normalized level meaningfully lower than the $6 billion to $7 billion that GE is targeting for 2018.
In other words, GE is a conglomerate that shouldn't exist but might need to exist for the time being. That's not nearly as exciting as a big breakup or a Buffett stake, but it bears repeating (yet again) that GE's only way out of this mess is probably a long slow grind of asset trimming and operational improvements.
This column does not necessarily reflect the opinion of Bloomberg LP and its owners.
Brooke Sutherland is a Bloomberg Gadfly columnist covering deals and industrial companies. She previously wrote an M&A column for Bloomberg News.
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