NORWALK: General Electric Co. intends to spin off part of its North American retail finance business next year as a separately traded public company, part of a long-term plan to generate less profit from the volatile financial sector and more from manufacturing.
The initial public offering, announced on Friday, should help reduce GE’s so-called “bank discount” on Wall Street. For years, investors have punished the company for relying on financial instruments, rather than manufacturing, to make money. Earlier this year, GE was labeled “Too Big To Fail” by the US government.
Shares of rivals Honeywell International Inc. and United Technologies Corp., which rely far less on lending for its profits, have eclipsed GE’s stock since the 2008 recession.
As part of the IPO, which Chief Executive Jeff Immelt hinted at earlier this year, GE said it will float about 20 percent of the retail finance unit in the initial public offering.
GE plans to exit the retail finance business entirely by 2015 via a complex, tax-free deal in which existing GE shareholders can chose to swap their GE shares for stock in the
new business. The move is expected to reduce GE’s total outstanding shares to about 9 billion to 9.5 billion shares from roughly 10.12 billion currently.
GE said it might decide to sell some or all of the remaining interest left after the IPO rather than swap equity with existing shareholders.
GE has tried for years to get out of the credit card business. In late 2007 it put the unit up for sale but did not find a buyer, sources told Reuters.
The exit is the “last major action” in GE’s plan to reduce profits from its GE Capital portfolio of financial products to 30 percent of the total, executives said in a presentation on Friday. The remaining profit comes from selling locomotives, jet engines, dishwashers and other industrial goods.
The new company, which has yet to be named, will emerge amid a tepid US economic recovery. GE Capital was named a systemically risky financial institution last summer by the US Financial Stability Oversight Council. The designation, commonly known as “Too Big To Fail,” in effect guaranteed more regulatory oversight of GE Capital.
“Overall, the economic activity in the US is OK,” Keith Sherin, head of GE Capital, said at the presentation. “We wish it were a little bit better.”
GE’s retail finance unit manages private-label credit cards, or loans for customers at Pep Boys, AGCO Corp.’s Massey Ferguson, La-Z-Boy Inc., Wal-Mart Stores Inc. among others.
The unit, which also makes personal loans to consumers to pay for such things as vacations and medical expenses, had $2.2 billion in net income last year. Sherin declined to provide forecasts or valuation estimates for the business, citing regulations.
“We think it’s a good time to exit this business, and this is the right business for GE to exit,” Sherin said.
GE Capital posted revenue of $46 billion last year. Its businesses include commercial loans, real estate, and financing for the aviation and energy sectors. Sherin said the unit will focus on those areas once the spinoff is complete.
Sherin expects GE Capital’s profit to dip in 2014 and 2015 as it divests the retail finance business, but to grow in line with its industrial businesses, starting in 2016.
Proceeds from the 20 percent IPO will be used to fund the new company, and Sherin said GE would focus next year on making sure it can operate independently.
At one time, the unit contributed nearly one-half of GE’s total profit, but its volatility during the 2008 recession nearly sank the entire company, prompting executives to begin to chart the unit’s trimming.
GE shares rose nearly 1 percent to $27.23.