General Electric Co. GE -1.20% Chief Executive Larry Culp is turning off the lights at GE Capital, a once sprawling lender, and shedding debts that have hung over the industrial giant since the 2008 financial crisis.
On Wednesday, GE agreed to combine its jet-leasing unit, GE Capital Aviation Services, with rival AerCap Holdings AER -2.66% NV in a deal worth more than $30 billion. It will create a leasing giant with more than 2,000 aircraft at a time when global travel has been hobbled by the Covid-19 pandemic. The Wall Street Journal reported Sunday that the two companies were near a deal.
GE will get about $24 billion in cash and 46% ownership in the new merged company. It will transfer about $34 billion in net assets to AerCap along with more than 400 workers. The deal is expected to close in 9 to 12 months.
Mr. Culp will use the proceeds from the AerCap deal to pay down debts and fold the rest of GE Capital into the company’s corporate operations. GE will take a $3 billion charge in the first quarter and cease to report GE Capital as a stand-alone business segment. The company maintained its financial forecasts for 2021.
“This really does mark the transformation of GE into a more focused, simpler, stronger company,” Mr. Culp said in an interview. GE will essentially return to being a manufacturer of power turbines, jet engines, wind turbines and hospital equipment.
A Look at GE
The jet-leasing Gecas unit was the biggest remaining piece of GE Capital, accounting for more than half of the unit’s $7.25 billion in revenue in 2020. The remainder is a legacy insurance business that has plagued the company and a small equipment-leasing operation that helps finance purchases of GE power turbines and wind turbines.
Shares of GE gained 2% in premarket trading to $14.26, the highest levels since May 2018. The stock has rallied in recent months after being battered by problems in the company’s core power and jet-engine business and losses inside GE Capital that forced GE to sell off assets and slash its dividend.
Although GE’s industrial businesses have improved under Mr. Culp and the company has paid down debts, concerns about additional losses or risks from GE Capital have weighed on investors.
Mr. Culp said the AerCap deal brings GE closer to being a well capitalized company after being “almost wholly focused on deleveraging and strengthening our operations.” As that happens, he noted that paying a higher dividend becomes an option. Two years ago, GE slashed its dividend to a token penny per share.
On Wednesday, GE also said its board has recommended a reverse 1-for-8 stock split, a move that would shrink the number of shares outstanding. “If you look at our share count, it is way out of whack with any conceivable peer,” Mr. Culp said.
GE Capital was once one of the largest lenders in the country, with more than $600 billion in assets it rivaled JPMorgan Chase & Co. and other banking giants. Using GE’s top-notch credit rating, GE Capital provided money for mortgages in Poland, long-term-care insurance for nursing home residents and financed power plant projects in Africa.
At its peak, it generated more than half of GE’s profits. But the 2008 financial crisis turned GE Capital into a liability that required a bailout to keep afloat. Starting in 2015, GE sold most of the operations and investors worried about risks in its balance sheet. Most of the insurance business became Genworth Financial Inc. The credit-card business became Synchrony Financial.
“GE Capital, for most investors, is seen as more of a risk than part of the future free cash flows,” said Daniel Babkes, a partner at Pzena Investment Management, which owns about 90 million shares of GE, or about 1% of its shares outstanding, according to FactSet.
“Moving on in a bigger way from GE Capital to focus on a really promising future for the industrial business, it feels like a smart move strategically,” Mr. Babkes said.
GE Chief Executive Larry Culp has sought to focus on core areas.
Photo: John Tlumacki/The Boston Globe/Getty Images
GE ended 2020 with about $75 billion in debt, with more than $50 billion tied to GE Capital. Mr. Culp said the company would pay off $30 billion in debt following the AerCap deal. He has taken other steps to repair GE’s balance sheet, cutting costs, refinancing debt and selling off a biopharma unit for $21 billion in cash.
Although GE has shrunk its debt by more than $30 billion over the last two years, the company’s once triple-A credit rating has been hovering a few notches above junk status. Instead of generating excess cash for GE, the parent company has had to prop up GE Capital in recent years. In the fourth quarter, GE sent $2 billion of cash to GE Capital.
By exiting the jet-leasing business, “you lose a lot of debt and that matters,” said Melius Research analyst Scott Davis. “It is how a lot of people think of the risk profile of GE.”
In December, Moody’s said that its negative outlook on GE’s credit rating reflected the pressure on the aviation division, which makes jet engines, and Gecas. Those challenges “halted the company’s progress in enhancing industrial margins and improving free cash flows, and prolonged the company’s deleveraging time path,” the credit rating company said.
The removal of Gecas from GE Capital would leave a legacy insurance unit with about $50 billion in assets that is responsible for long-term care policies. In early 2018, GE surprised investors when it had to set aside $15 billion in reserves to cover the costs of those policies, which proved to be more expensive than the industry expected. With the absence of Gecas, those policies now represent the bulk of GE Capital’s remaining assets.
“I’m not sure this does anything relative to creating more options in the near term relative to insurance,” Mr. Culp said, noting that the Gecas deal will make GE a stronger counterparty to a potential partner. “If there is a deal to be done, it will be done.”
—Cara Lombardo and Emily Glazer contributed to this article.
Write to Thomas Gryta at [email protected]
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