Only a few months ago, investors were convinced that General Electric (NYSE: GE) was on the rocks because of its heavy debt. Last fall, the company reduced its quarterly dividend to $ 0.01 per share and sold nearly a quarter of its shares in Baker Hughes, a GE company (NYSE: BHGE) as part of an effort to calm the markets.
However, any reasonable doubt about GE's ability to pay off its debts disappeared on Monday. First, the company finalized the merger of its transport division with Westinghouse Air Brake Technologies (NYSE: WAB), generating an immediate product of $ 2.9 billion. Second, and more importantly, GE has announced the signing of an agreement to sell its BioPharma business to Danaher (NYSE: DHR) for more than 21 billion dollars.
Evaluate GE's debt problem
General Electric ended the year 2018 with an industrial net debt of about $ 55 billion. Last June, it aimed to reduce this amount to $ 25 billion by the end of 2020. The company must also inject more money into GE Capital to consolidate the balance sheet of this unit.
Last month, GE indicated that between its remaining shares of Baker Hughes, the product of its merger with Wabtec in the transportation sector and its plan to make an initial public offering in the sector Health after transferring $ 18 billion in debt and pensions to this subsidiary, it up to $ 50 billion to meet its debt reduction needs.
The problem is that the health care sector contributes a substantial share of GE's profits. Given that the GE Power sector is currently losing money and spending a lot of money, even a $ 25 billion industrial net debt would be more than ideal for General Electric without the stabilized presence of the company. Health unit.
GE Transportation and Wabtec join forces
The GE-Wabtec agreement, concluded Monday, will allow General Electric to move a little forward in its debt reduction plan. GE first confirmed that it would leave the transportation sector last May. It sells some assets to Wabtec for $ 2.9 billion and then merges the rest of its transportation business with Wabtec in a stock-only transaction.
On the basis of updated agreement terms published last month, Wabtec shareholders will own 50.8% of the combined company. GE will receive a 24.9% economic interest in the new Wabtec, while GE shareholders will receive the remaining 24.3% of the company.
General Electric is to sell its entire stake in Wabtec over the next three years. Based on the current value of the security, which has increased significantly after Wabtec's earnings report released on Monday, this could yield nearly $ 4 billion in pre-tax cash.
Participate in the biggest asset sale so far
All of General Electric's recent divestments are derisory compared to the agreement announced by Danaher on Monday. Danaher will acquire GE Healthcare's BioPharma division, which provides tools for the development and manufacture of biopharmaceutical drugs for $ 21 billion in cash, supported by about $ 400 million in pensions.
This $ 20 billion segment of GE's healthcare sector is expected to generate only $ 3.2 billion in revenue this year. However, it is growing rapidly and producing very strong margins.
Taxes and separation costs will inevitably consume some of the proceeds from this sale of assets. But GE should still reap more than $ 15 billion that it can use to repay its debt. Between the recently completed disposal of GE Transportation and the sale of BioPharma, which is expected to be finalized in the fourth quarter, GE is expected to be able to reduce its net debt to at least $ 20 billion by 2019.
GE has options
The conclusion of the Danaher contract is now a top priority for GE. As a result, the previously announced IPO of GE Healthcare has been deferred indefinitely. But it does not matter – it is no longer urgent. The company now has more options to carry out its debt reduction plan.
The accumulated value of GE's holdings in Baker Hughes and Wabtec is approximately $ 18 billion. The company could choose to sell these holdings quickly in order to reduce industrial net debt to $ 25 billion or less by 2020. In this scenario, it would never need to sell or split the rest the health care sector, which generates $ 17 billion in revenue and operating profit of about $ 2.5 billion a year. By keeping this important stream of profits, it would be easy for GE to bear a net industrial debt of $ 25 billion.
Alternatively, General Electric could proceed to an IPO in the health sector in 2020 and postpone the sale of the holdings in Baker Hughes and Wabtec until such companies have had time to grasp the synergies resulting from 39 – a fusion – and thus potentially become more valuable.
One thing is certain, though. The recently concluded Wabtec transaction and the massive Danaher transaction will enable GE to reach the target of its net debt. Between the remaining holdings in Wabtec and Baker Hughes and the potential for a future IPO in the health sector, GE clearly has enough sources of cash to handle everything the future will bring to it. General Electric still has a lot of work to do to repair its troubled energy sector, but at least investors can stop worrying about the company's debt.