General Electric, the industrial conglomerate, made the decision to split the company into three focused business operations this week, after years of slashing high debt levels, battling elevated costs at center, embarking on asset sales, and numerous other restructuring efforts.
The spin-offs will result in GE Aviation, Healthcare, and Power enabling investors to pick and choose which businesses they want to own.
Aviation the largest division by revenue with jet engines, its most profitable segment, generating strong cash flows. It was unfortunately impacted by the Covid-19 pandemic which stymied the air travel industry over the past two years resulting in cancellations of orders for new aircraft.
The break-up plans are a positive move with the new stand-alone entities becoming more focused, with their own clearer capital deployment and specific business models. This move is like that of Siemens, which was split into listed focused entities.
General Electric was founded in 1892 and seemed to have lost its way acquiring diverse businesses, such as mortgages, credit cards, TV, entertainment, and a host of other entities. This resulted in a major underperformance over the past decade. The appointment of Larry Culp in 2018 ushered in a new era for the group. The recent $30 billion merger of GE Jet leasing operations with an Irish company, and the sale of the Biopharma business for $21 billion, resulted in a reduction in gross debt from $140 billion in 2018 to less than $65 billion currently.
GE will become a focused aviation entity operating under the GE banner, manufacturing, selling and servicing aircraft engines. This includes more than 26,000 military engines and 37,000 commercial engines sold over the past years. A backlog of orders, estimated to be in the region of $260 billion, are expected to be rolled out as global economies normalize. The power and renewable Energy unit, producing, selling and servicing gas and wind turbines, also has a major backlog in orders and should benefit from green energy zeitgeist.
It is early days for the pending transformation of GE to benefit shareholders, however Deutsche Bank have arrived at a price based on the sum of the parts of $131.00, with RBC analysts sharing similar views. The current share price of $108.00 could herald a value unlock for patient investors, and the move should be seen as a positive move away from the old-style multinational conglomerate model.