More Change At GE
During its Q3 2017 earnings call GE’s management team promised investors it would rightsize the Power division. It subsequently announced it would lay off 12,000 employees and wring out $3 billion in costs from the segment. Management also vowed to reduce the number of metrics it measures to explain the business, and to reduce the amount of change at the company. However, management has continued to search for a new narrative. During its Investor Update three months ago GE announced it was halving its annual dividend from $0.96 per share ($8.4 billion) to $0.48. Now the company wants to hive off part of its Power division.
If Power is the company’s bread and butter and is part of GE’s DNA then why would management consider selling pieces of it? Management is on record that Power, Healthcare and Aviation are its core businesses. However, it appears this could change depending on which way the wind blows. If the industrial gas engine sale goes well it could be the precursor to the break-up of GE. At the end of the day, the company’s operations and “core” earnings remain opaque. It is difficult to invest in a company when you do not know how it makes money, or if it makes money.
The Sale Could Be A Major Risk
GE is in need of capital. At the end of 2016 the company had an estimated pension shortfall of over $30 billion. It also needs $15 billion in reserve contributions for its insurance unit over the next seven years. The successful sale of its industrial gas engine unit would not solve GE’s capital requirement. However, a failed deal could hurt sentiment for the stock. A failed deal could imply that problems at Power are bigger than once thought. It could also imply that half measures are not working and the only other option would be to raise equity to help shore up GE’s capital base. A dilutive event when the market senses desperation could be highly-costly for GE and its investors. At the end of the day, I believe the risks of a soured deal outweigh the benefits of a successful transaction.
Conclusion
With the rumored sale of a piece of GE’s core Power division, management appears to be grasping at straws. GE and its Power division’s demise will likely continue. GE remains a sell.
