General Electric (NYSE:GE) recently filed a statement with the Securities and Exchange Commission for the initial public offering of its North American retail finance unit.  This unit, which post its IPO will be called Synchrony Financial, is the largest issuer of private-label credit cards in the U.S., ahead of Citigroup and Capital One Financial Corp. that are the second and third largest issuers of store credit cards respectively. According to estimates, this GE unit will be valued at around $20 billion. 
For GE, this move will enable it to shift closer to its industrial roots and lower exposure to the financial sector. This is a deliberate strategy of GE that evolved in the aftermath of the financial crisis of 2008-09. At the time, GE generated more than half of its earnings from its finance arm – GE Capital. But during the crisis, this segment was severely impacted and consequently GE’s stock price fell to single digits and it was forced to slash its dividend. Divestiture of the North American retail finance unit will help GE reduce the size of GE Capital to an extent where it constitutes around 30% of the company’s total earnings.
We currently have a stock price estimate of $27.03 for GE, around 5% more than its current market price.
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GE Seeks To Create A GE Capital Which Is Smaller & More Closely Aligned With Its Industrial Business
This IPO of GE’s North American retail finance unit is only the first step in its complete divestiture. The company plans to offload about 20% of its stake in this unit through the IPO, which is expected to close later this year. Thereafter, GE plans to offload its remaining stake next year through multiple ways which include swapping GE shares with Synchrony shares in an offer to its existing shareholders.
We figure the time for this IPO is also right as store sales through credit have steadily expanded, indicating the growing use of store credit cards. Retailers have also adopted these credit cards which bear their names as they cost less than general-purpose credit cards that are Visa or MasterCard branded. However, these cards come with a limitation for customers who can swipe them only at the issuing retailer. GE’s North American retail finance unit, which provides financing for sales on these store credit cards, counts the nation’s largest retailers such as Wal-Mart Stores (NYSE:WMT) and Lowe’s (NYSE:LOW) as its clients. The company also indicated in its SEC filing that payment defaults on these store credit cards has come down significantly since the financial crisis, indicating that the business is more stable now. In its filing, GE said that the percentage of customers who are more than 30 days late on their payment on these credit cards has declined from 8.2% in 2009 to 4.3% at the start of 2014. 
On its part, GE is offloading this unit as opposed to its other finance units, as it wants to focus its overall finance business on lending to mid-size companies and verticals such as aviation and energy where it possesses deep domain knowledge. Therefore, the company is trimming its consumer finance business, while growing its commercial lending, aviation capital and energy finance businesses.Notes:
- GE announces filing of registration statement for IPO of its north american retail finance business, March 13 2014, www.ge.com [↩]
- GE financial services unit may be valued at more than $20 bn in IPO, November 15 2013, www.ft.com [↩]
- GE’s form S-1 filing for the IPO of its North American retail finance arm, March 13 2014, www.sec.gov [↩]