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Visitors look at a model of the LEAP engine at the General Electric booth at the China International Import Expo in Shanghai, China, on November 8, 2021. Picture: BLOOMBERG/QILAI SHEN
Visitors look at a model of the LEAP engine at the General Electric booth at the China International Import Expo in Shanghai, China, on November 8, 2021. Picture: BLOOMBERG/QILAI SHEN

General Electric (GE) will split into three separate companies in a stunning break-up of the iconic manufacturer founded by Thomas Edison the sprawling businesses of which once made it the world’s most valuable company. The shares surged.

GE will spin off its healthcare business in early 2023 and combine its renewable energy, fossil-fuel power and digital units into a single energy-focused entity that will be spun off a year later, the company said on Tuesday. The remaining company will consist of GE Aviation, its jet-engine division. 

“What we’re doing today is creating three outstanding investment-grade, global leaders in healthcare, aviation and energy,” CEO Larry Culp said in an interview. “GE has led in these markets for a long time and today we’re setting ourselves up for another century of leadership.”

GE shares rose 5.7% to $114.60 in New York and earlier gained as much as 7.1%, the most intraday since May 27. the Boston-based company said it expects to take a one-off $2bn charge from separation, transition and operational costs tied to the plan, plus tax costs of less than $500m.

“The break-up makes strategic sense,” Deane Dray, an analyst with RBC Capital Markets, said in a note. It could generate 20% upside to GE’s current share price, according to his analysis. There will be “attractive value to be unlocked”.

End of era

The sweeping plan marks the end of an era in which conglomerates defined much of 20th-century corporate America and follows the break-up of several other large, diversified companies as investors favour focus over breadth. Dray, in his analyst note, cited 3M, Emerson Electric and Roper Technologies as candidates for possible separations.

In a call with analysts, Culp called the announcement a “defining moment” for GE.

Culp’s vision is also a rebuke of the strategy championed by Culp’s larger-than-life predecessors, including Jack Welch, who famously built the company into a diversified juggernaut with businesses spanning television, finance, energy and many other unrelated markets. Welch’s successor as CEO and chair, Jeffrey Immelt, continued to reshape the company over about 16 years starting in 2001, though with notably less success. 

One sign of how much GE had fallen by the wayside: 20 years ago, it was the world’s largest company with a market capitalisation of $401bn. Five years ago it was just hanging on in the top 10; and as of Monday there were dozens with bigger market caps in the S&P 500.

Culp’s arrival

Culp, who previously reshaped Danaher, was tapped as GE’s CEO in October 2018 as the company was facing multiple crises including trouble at its financial services arm and power business. He moved swiftly to stabilise and turn around the manufacturer, slashing GE’s venerable dividend to a token penny a share. 

Culp since sold major businesses to cut GE’s bloated debt, pushed operational fixes to bolster cash flow and profits at its industrial divisions and mitigated the Boston-based company’s risks in a broad retrenching from its once sprawling conglomerate structure, including the sale of the bulk of the GE Capital finance arm.

Each of the three companies that result from the break-up will have its own board of directors.

The stand-alone healthcare business will be run by GE Healthcare’s incoming CEO Peter Arduini, who previously was held the top post at Integra Lifesciences, while Culp will be the business’s executive chair. GE plans to retain a roughly 20% stake in the stand alone healthcare business. The spin-off will be tax-free.

Three businesses

The company also said the healthcare business will issue debt securities, the proceeds of which will be used to pay down outstanding GE debt. In the longer-term, GE expects the business to generate operating profit margins in the high-teens to 20%. 

GE Power CEO Scott Strazik will lead the combined energy businesses, consisting of GE’s gas-power, renewable energy and digital businesses. That leaves GE Aviation, the world’s biggest maker of jet engines, as the remaining GE entity. 

“What we’re really doing is positioning these businesses to reach their full potential,” Culp said. “There is no question that this is the best way in our view to create long-term value.”

The energy unit holding GE’s renewable and fossil-power businesses should achieve mid- to high-single digit margins even with low rates of growth. GE Aviation’s margins could reach 20%, according to GE’s investor presentation.

Trian response

Culp’s plan was praised by Trian Fund Management, the activist fund led by Nelson Peltz that amassed a $2.5bn stake in GE in 2015 and demanded more dramatic actions to revamp the corporation. 

“The strategic rationale is clear: three well-capitalised, industry leading public companies, each with deeper operational focus and accountability, greater strategic flexibility and tailored capital allocation decisions,” Trian said in a statement. “We salute GE CEO Larry Culp and his team’s efforts in driving long-term shareholder value.”

Each company will be better positioned to serve its customers, benefiting from greater focus, accountability and agility, GE said. 

It also expects debt reduced by the end of 2021 to exceed $75bn since the end of 2018, more than the $75bn anticipated previously. It also plans to bring the ratio of its net debt to earning before interest, taxes, depreciation and amortisation to less than 2.5 in 2023.

Bloomberg News. More stories like this are available on bloomberg.com

A technician stands near a section of an offshore wind turbine at a General Electric plant in France. Picture: REUTERS
A technician stands near a section of an offshore wind turbine at a General Electric plant in France. Picture: REUTERS

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