General Electric Company (NYSE:GE) is finally doing what analysts expected, even demanded it do after John Flannery became CEO last year.
GE is breaking itself up.
But because GE is in the straits it’s in, this must be done in a GE way. This started May 21 with news it would be merging its train engine business with Wabtec Corporation (NYSE:WAB), a $20 billion deal giving GE 50.1% of the merged entity and $2.9 billion in cash.
The irony is that Wabtec’s history goes back to the Westinghouse Air Brake Co. Yes, that Westinghouse. General Electric itself was formed in 1892, in large part, to compete with George Westinghouse, who had decided AC current worked better at scale than Thomas Edison’s DC. (It did.)
George Westinghouse founded the air brake company in 1869, when he was 22. It was the foundation of his fortune.
Finding New Homes
This is how GE is likely going to proceed, Flannery looking for viable homes for parts of the company that can’t stand on their own and make no sense on his books from a growth standpoint.
The rail engine business is the heart of what predecessor Jeff Immelt grandly called GE Transportation. It’s separate from the unit that makes aircraft engines, GE Aviation, which is one of the stars of the portfolio.
Combining with Wabtec doesn’t get rid of the rail unit, but it does give Flannery enough market share and breathing room to possibly squeeze out some profits. If it can show profits, the division could be spun out at a price over the $20 billion it’s now valued at.
The deal is similar to what predecessor Jeff Immelt did with the company’s oil and gas division, combining it with Baker Hughes to create Baker Hughes, a GE Co (NYSE:BHGE). BHGE is now up 11% on the year, thanks to renewed growth in fracking, and GE holds 63% of it. This is called making lemonade out of lemons.
Flannery is also looking for ways to get out of lighting, and GE Power, finding capital that could be plowed into fast-growing areas like renewable energy and GE Health, which Flannery ran before taking the top job.
The aim is to get the stock price back up.
GE hit a low of under $13 per share in April, and it opened for trade today at over $15 per share. That gives it a market cap of $130 billion, on 2017 sales of $122 billion.
Immelt destroyed GE’s balance sheet by using its GE Capital unit as a cash cow, selling it off in bits and pieces to keep the company’s dividend going. He also pretended that things like Alstom turbines could grow while energy demand was slowly sinking.
Flannery is now ending his first year as CEO and the easy work of admitting problems and setting a course, which included cutting that dividend in half, has now been done.
Now he must execute.
The Bottom Line for General Electric
When Flannery announced his reorganization plans in November, GE shares were trading at a discount of $90 billion to the value of its businesses. The gap has widened since.
If he can do a spin-off of GE Power that looks as good as the one he just did of the rail business, Flannery could get closer to the mark. But Alstom — what Immelt once told the press was his “best deal” — remains an albatross around Flannery’s neck, and I wouldn’t recommend you buy the stock until he deals with it.
But at least we have a path forward.
Dana Blankenhorn is a financial and technology journalist. He is the author of the historical mystery romance The Reluctant Detective Travels in Time, available now at the Amazon Kindle store. Write him at danablankenhorn@gmail.com or follow him on Twitter at @danablankenhorn. As of this writing he owned no shares in companies mentioned in this story.
