通用电气的重大变化

The management team at General Electric has recently embarked on some additional big changes for the company.

The latest move will result in a major write-down but will generate billions in cash for the firm.

In addition, management is buying back debt in an attempt to reduce leverage and lower its annual interest expense.

At their core, these moves are beneficial for investors and more moves like this are likely to happen moving forward.

As a company in transition, investors should expect a lot of changes to pop up from the management team at General Electric (GE). Case in point, we have what transpired the other day when the company came out with two meaningful announcements, one which will help the firm to further monetize some of its non-core assets, and another that will permit it to take yet another chunk out of its bloated debt. Though management is choosing to forego long-term profits associated with the assets being divested, the benefit of a leaner, more focused industrial conglomerate cannot be overstated.

Since 2016, it has been pretty clear that the management team at General Electric had plans for the company's Oil & Gas segment that was different from the rest of the enterprise. As the top brass at the firm changed and the company moved along with its restructuring, the business eventually announced plans to merge its Oil & Gas business with Baker Hughes to create energy services giant Baker Hughes, a GE Company (BHGE). Since that deal, management has started slowly unwinding its ownership in the firm, giving the business the ability to focus on its core operations and generating cash in the process.

On September 12th, the management team announced that it had struck yet another deal in its divestiture of its ownership interest. The firm has decided to pursue a public offering of 115 million of its units in BHGE, plus it will give underwriters associated with the deal the ability to acquire 17.25 million additional shares. In addition to this, General Electric has received a commitment from BHGE that the latter will acquire from the former $250 million worth of shares in the business as well, plus corresponding non-public interests in BHGE LLC. Given the then-current price of units, without the underwriter's option, management expects to generate net proceeds from these sales worth $2.7 billion. If the underwriter's option is exercised, this will grow to around $3 billion.

Prior to the divestiture, General Electric owned 50.2% of BHGE, and this, combined with some aggressive accounting, had caused a bit of a problem to go around the news headlines a few weeks back. In short, Harry Markopolos, the legend who successfully discovered the Bernie Madoff Ponzi scheme several years ago, made the allegation that because General Electric was consolidating BHGE's numbers into its own, and given that BHGE was also its own publicly-traded company, that this was part of a massive fraud taking place within the conglomerate.

Without diving too much back into the weeds, I would like to refer you to an article I wrote debunking that portion of the Markopolos report. In short, the confusion that I believe Markopolos overlooked came from the fact that there are two BHGE entities, one that is publicly-traded and another that is a pass-through entity, with the relationship between the two creating the effect that Markopolos railed against without the possible legal issues associated with it.

As a result of this current divestiture and assuming then-current pricing on BHGE units, General Electric should still own around 38.4% of the company, currently worth billions of additional future cash proceeds. Management did say, though, that because of this sale it will have to deconsolidate its ownership in the firm. As of the end of July when shares of BHGE were worth $24.84 apiece, this would have resulted in a write down on General Electric's books of about $7.4 billion. Each $1 move in the share price should affect this figure by about $500 million. Given that units of BHGE are, as I type this, about $22.72, this translates to an additional write down of about $1.06 billion.

*Taken from General Electric

Using, it seems, the $2.7 billion to $3 billion in proceeds it will receive from its BHGE divestiture, the management team at General Electric has decided to reduce its debt by offering tenders for $5 billion worth of its notes outstanding. Half of the amount will be allocated toward dollar-denominated notes, while the other half will be allocated toward buying back euro-denominated notes. These can be seen in the image above and in the image below.

*Taken from General Electric

Normally, I like to provide analysis covering multiple scenarios of how this will play out, but it looks as though paying off the first priority notes will be the same as paying off the highest interest ones first, so the results on that front should be the same. In either case, if the first priority notes get picked off first, followed by the second priority and then on, and if we assume an exchange rate of $1.107 against the euro, then $5 billion will allow General Electric to buy back about $4.796 billion worth of debt with an aggregate interest savings of about $164.62 million or about 3.3%. This isn't a great interest savings, and it is discouraging to see management buy back debt at a premium, but it's all part of the strategy of slimming operations down.

Right now, General Electric is in the midst of making some major changes, and while I do not agree with everything the company is working on (like divesting of its BHGE ownership), I am generally in favor of the current course of action that involves paying down debt through non-core asset sales. This latest move will cause some turmoil on the company's books, but management has been warning about this for several months now. The end result as investors should think about it will be a leaner, less heavily leveraged company that's better prepared for the future.

I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.