A Look At GE’s Strategic Portfolio Repositioning In 2014

General Electric (NYSE:GE) is finishing 2014 as a different company from the one at the beginning of the year. The industrial conglomerate aggressively repositioned its portfolio during the year through multiple acquisitions and divestitures. The portfolio changes that the company made during the year have taken it closer to industrial infrastructure businesses and away from financial businesses. GE has been executing this shift in its portfolio since the financial crisis of 2009, during which time it was severely impacted due to its over-reliance on its financial businesses. In 2014, GE undertook three major portfolio decisions that have accelerated its shift towards infrastructure businesses. As 2014 draws to a close, we revisit these major portfolio changes and analyze how they will benefit GE in the coming years.

We currently have a price estimate of $28 for GE, about 10% ahead of its current market price.

See our complete analysis of GE here

Alstom Acquisition Enhances GE’s Long-Term Growth Potential

In June, GE received approval to acquire the power and grid businesses of French major Alstom. In our view, as Alstom significantly expands the scale of GE’s power business, the deal will enhance GE’s long-term growth potential. Scale is an important factor in the global power sector as it enables a company to occupy a greater share of growth in global power generation capacity. According to figures cited by GE, approximately 3,400 GW of power generation capacity will be added worldwide over the next decade. ^[1] Greater scale, enabled by the acquisition of Alstom, will allow GE to bag a greater share of this rapid expansion in global power generation capacity. Additionally, more than 50% of this addition in global power generation capacity (about 1,600 GW) will be gas and steam turbine based. ^[1] GE is already a world leader in production and maintenance of gas turbines, but lacks in the steam turbine space. Alstom fills this gap well in GE’s portfolio, as its steam turbines are not only highly advanced but also have a large installed base in Europe. The acquisition of Alstom’s steam turbine business (that lies outside of France) will also help GE expand its presence in the coal-fired power plant market, which is rapidly growing in many regions of the world, especially China and Africa. Together, the gas and steam turbine businesses of Alstom constitute the bulk of its overall power business, which had $15 billion in sales last fiscal year. ^[2]

In comparison, GE’s power business constitutes the bulk of its power & water segment, which had revenues of $24.7 billion in 2013. So, the gas and steam turbine businesses of Alstom will add significant scale to GE’s existing power business. These businesses of Alstom are also profit making and have many long term maintenance contracts with power plant operators across the world. Separately, large revenue and cost synergies exist between the power businesses of GE and Alstom that make this deal more lucrative. GE forecasts this deal to add 1 cent a share to its earnings in 2015, and about 6-9 cents a share in 2016. ^[3]

Synchrony Financial Deal Allows GE To Sharpen Focus On Commercial Finance

After Alstom in July, GE completed the initital public offering (IPO) of its North American Retail Finance Unit, named Synchrony Financial (NYSE:SYF). This unit is one of the largest issuers of private-label credit cards in the U.S. alongside Citigroup and Capital One Financial Corp. The IPO of Synchrony is GE’s first step in a staged exit from this business. GE has offloaded about 15% of its stake in this unit through the IPO, and it plans to offload its remaining stake by the end of 2015. Shares of Synchrony are up 20% since the IPO, indicating that the new company has been well-received by the market.

GE is divesting this unit from its financial arm, GE Capital, as opposed to other units, as the company wants to focus GE Capital on lending to mid-size companies and verticals such as aviation and energy where GE possesses deep domain knowledge. After Synchrony’s divestiture, GE Capital’s ending net investment (ENI), which provides a measure of its asset size, will fall below $300 billion, from a peak of about $630 billion in 2008. ^[3] Since the financial crisis, GE has followed a conscious strategy of reducing the size of GE Capital in order to reduce its exposure to the financial sector. During the financial crisis, GE was generating over 50% of its earnings from its financial arm. This high dependence sank GE’s stock into single-digits, forcing the company to slash its dividend, when financial markets across the world crashed during the crisis.

Sale Of Appliances Unit Focuses Industrial Segment On Infrastructure

In September, GE announced the sale of its century-old consumer appliances unit to Electrolux for $3.3 billion in cash. ^[4] The company decided to sell this business as it did not fit the company’s strategy of repositioning the portfolio around core infrastructure businesses. In addition, returns from the appliances unit were lagging behind other GE businesses. The operating margin at the appliances unit hovered in low single-digits, while margins at other GE businesses, including power, oil & gas, aviation and healthcare, consistently remained in double-digits. The sale price of $3.3 billion valued the appliances unit at eight times its annual EBITDA. ^[4] So, in our view, the sale of the appliances unit allowed GE to unlock value from a low-margin business that did not fit its infrastructure model.

All in all, these three major portfolio changes – the acquisition of Alstom, and divestiture of Synchrony and the appliances unit – have accelerated the shift in GE’s portfolio towards core infrastructure businesses. By 2016, the company anticipates to generate only 25% of its earnings from its financial arm, down from more than half in 2008. In our opinion, this strategic shift in GE’s portfolio will insulate it from future shocks in the volatile financial world. At the same time, increased dependence on infrastructure businesses will sharpen GE’s focus on these businesses, which are more stable and provide long-term growth opportunities.

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1. GE-Alstom alliance graphics, June 21 2014, www.ge.com [↩] [↩]
2. GE offers $13.5 billion enterprise value to acquire Alstom Thermal, Renewables, and Grid businesses, April 30 2014, www.ge.com [↩]
3. GE’s 2014 annual investor outlook meet, December 16 2014, www.ge.com [↩] [↩]
4. GE agrees to sell appliances business to Electrolux for $3,3 billion, September 8 2014, www.ge.com [↩] [↩]