GE Plans Partial IPO of Consumer Finance Unit in 2014

General Electric Co. (GE) will sell as much as 20 percent of its North American consumer lending business in a 2014 initial public offering as Chief Executive Officer Jeffrey Immelt shrinks reliance on financial profits.

The IPO will be the first step toward an exit from retail finance operations, the company said as its GE Capital Corp. unit held an investor meeting today in Norwalk, Connecticut. GE Capital CEO Keith Sherin declined to give a potential valuation for the North American consumer lending division.
Enlarge image GE CEO Jeffrey Immelt

The IPO advances Chief Executive Officer Jeffrey Immelt’s objective of boosting the share of GE’s earnings generated by units making industrial products from jet engines to medical scanners. Photographer: Andrew Harrer/Bloomberg

Unwinding the business, whose products include store credit cards for companies including Wal-Mart Stores Inc. (WMT) and J.C. Penney Co., bolsters Immelt’s bid to boost the share of earnings from units making industrial goods such as medical scanners. He has been slimming GE Capital since credit markets froze in the 2008-09 financial crisis, imperiling the parent company.

“GE isn’t reducing finance because it has a new religious attachment to industrial,” said Brian Langenberg, principal and director of research at Chicago-based Langenberg & Co. “This is about reducing the potential for future pain.”

GE rose 0.7 percent to $27.19 at 11:55 a.m. in New York. The shares gained 29 percent this year through yesterday, beating the 26 percent advance for the Standard & Poor’s 500 Index.

IPO Timing

A registration statement for the IPO will be filed in the first quarter, and the transaction completed “later in 2014,” Fairfield, Connecticut-based GE said in a filing. Proceeds will go to increase capital at the new company, and the pullback from the business will be finished in 2015 with a tax-free stock distribution to GE shareholders, GE said.

“This the final last step, the biggest step remaining in the transformation of the portfolio of GE Capital,” Sherin said at the investor meeting.

GE, the world’s largest maker of jet engines and locomotives, had been moving in this direction for months, after Immelt signaled in May he was considering an IPO for parts of the consumer finance unit. Counting on a bank to buy financial-service assets would be “a fool’s errand,” making an IPO the likely outcome, he said at an investor conference.

Sherin said earnings for GE will be down a “little bit” in 2014 because of the IPO. Analysts had projected profit excluding some items of $1.79 a share next year, according to the average of 15 estimates compiled by Bloomberg.

Industrial Profit

Profit at GE’s industrial divisions will account for about 65 percent of operating earnings by 2015, the company said at a meeting with investors and analysts last year. Those earnings made up 55 percent of profit, on the same basis, in 2012.

As GE Capital exits the North American consumer finance business and sheds some other assets, annual earnings at the unit will drop to $5 billion in 2015 from about $7.7 billion in 2013, Sherin said. That would make up about 30 percent of GE earnings and will begin to grow in 2016 in line with GE’s industrial businesses, he said.

Sherin said the consumer finance unit is an “excellent business” that didn’t fit with the rest of GE. The timing of the transaction is good because capital markets are strong, he said.

“When we looked at the position we have in credit cards and we look at the synergies we get between our commercial lending businesses and the rest of GE, we just don’t see that,” Sherin said.

Dividend Cut

GE Capital was squeezed during the financial crisis that followed the September 2008 bankruptcy of Lehman Brothers Holdings Inc., forcing Immelt to reduce GE’s dividend for the first time since the Great Depression and tap government debt guarantee programs to contain the damage.

Standard & Poor’s and Moody’s Investors Service stripped GE of its top credit ratings and the stock plunged to a 16-year closing low of $6.66 in March 2009. As Immelt moved to shrink GE Capital, the unit’s ending net investment, a measure of its balance sheet excluding non-interest-bearing liabilities and cash, shrank 25 percent to $384.6 billion as of Sept. 30 since the start of 2009, according to a Nov. 1 filing.

Today, the cost to protect GE Capital’s debt from default for five years fell to the lowest level since January 2008, signaling the company is the most creditworthy it’s been since then in the eyes of derivatives traders.

Credit Swaps

Credit-default swaps tied to that debt, which typically decline as investor confidence improves, touched 69.9 basis points, the least intraday since Jan. 9, 2008, according to Bloomberg prices. The contracts climbed to 72.2 basis points today as of 11:26 a.m. in New York.

Credit swaps pay the buyer face value if a borrower fails to meet its obligations, less the value of the defaulted debt. A basis point equals $1,000 annually on a contract protecting $10 million of debt.

With the consumer finance business, GE is revisiting the strategy it used to divest its insurance unit through five stock offerings over a two-year span beginning in 2004 to accomplish that goal, capped by a final sale of Genworth Financial Inc. (GNW) shares in 2006.

In 2006, GE sold its GE Insurance Solutions reinsurance business for $7.4 billion to Swiss Reinsurance Co.