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GE CEO Larry Culp. Source: Financial Times
In a deal that rocked the financial markets, General Electric (GE) agreed to sell its biopharmacy business to Danaher Corporation (DHR) for $ 21.4 billion:
Shares of General Electric Co. exploded on Monday after the signing of an agreement to sell $ 21.4 billion of its biopharmaceutical business to Danaher Corp., but are well on their way to expanding their footprint. long period under the 200-day moving average for at least 40 years.
GE said the biopharmaceutical sector, which was part of GE Life Sciences and was under the umbrella of GE Healthcare, had generated a turnover of about $ 3 billion in 2018.
GE CEO Larry Culp was previously Danaher's CEO from 2001 to 2014. He is blamed for Culp leading the recovery of Danaher. Remains to know if he can transform GE in the same way. The news has pushed GE more than 8% Monday afternoon. I think this agreement is a master stroke for the following reasons.
This is causing serious damage to GE's indebtedness
As part of the turnaround efforts, Culp is committed to reducing GE's significant debt, whether through the sale of assets or through cash flow. The company sold GE Transportation and sold a substantial stake in Baker Hughes (BHGE). However, the biopharmaceutical agreement has stunned me, because of its sheer size. In the fourth quarter of 2018, GE's total debt amounted to $ 110 billion, up from about $ 115 billion in the third quarter. A $ 21 billion payment on its debt (assuming there was no tax leakage) would reduce GE's debt burden by about 19%.
Apart from another sale of its stake in Baker Hughes or a Healthcare divestiture, there was no short – term scenario in which GE was considering reducing its debt. such an important amount. Apart from the biopharmaceutical agreement, a series of operations could have been carried out to reduce the debt by such a large amount. The ongoing conclusion of transactions could also have attracted more management attention.
This improves GE's credit statistics
I am bearish to GE because of the deterioration of its core business of Energy and its unsustainable debt. In the fourth quarter of 2018, I estimated that GE's debt amounted to 7 times the EBITDA, for an amount of 115 billion dollars. I also asked why the rating agencies had not downgraded GE to spam status. In my opinion, the sale of any asset whose multiple is greater than 7 times the EBITDA (1) would reduce GE's debt / EBITDA and (2) would have a positive credit effect.
Market discussions suggest that the purchase price represents 17x EBITDA for 2019 for GE Biopharma. This would exceed GE's debt / EBITDA ratio by approximately 7 times and would be positive in terms of credit. Management has not disclosed what GE's debt / EBITDA would be after the transaction. Despite this improvement, GE's debt / EBITDA ratio is likely to exceed 4.5 to 5.0 times the spam status considered. In the first quarter of 2019, sector profits in the energy, aviation and renewable energy ("NewCo") sectors again fell to double digits. This implies that NewCo represents the bottom of GE's remaining operations.
This could allow GE to forgo a health care sale
GE has considered divesting its health care business. Market discussions suggest that Healthcare could have leveraged $ 60 billion or more. According to rumors, GE would rethink Healthcare's IPO after the GE Biopharma agreement. GE Biopharma's implied EBITDA for 2019E is approximately $ 1.3 billion. Assuming that a debt / EBITDA ratio of 4x is appropriate to guarantee Investment Grade status, the additional capital from a sale beyond 4x EBITDA could then be considered a capital increase. In this example, GE was to sell GE Biopharma for at least $ 5 billion (about 4 times the EBITDA). The $ 21 billion sale exceeded the threshold of about $ 16 billion, which could be considered a de facto capital increase.
I've suggested that instead of divesting assets, it would be safer for GE to raise equity. Raising more than $ 15 billion in equity (assuming there are no tax leaks) could actually ensure that GE maintains its health care. This would allow GE to retain a large asset with strong cash flow to support its remaining debt. Health care could also help offset the steady decline in power.
Conclusion
The GE Biopharma agreement was a master stroke. However, GE's debt / EBITDA ratio is likely to remain in undesirable territory. I continue to evaluate GE as a sale.
Disclosure: I am / we are GE short. I have written this article myself and it expresses my own opinions. I do not receive compensation for this (other than Seeking Alpha). I do not have any business relationship with a company whose actions are mentioned in this article.
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