In its concerted effort to reduce credit risks,
General Electric Company
) is planning to shrink its finance business by 2015 through the
divesture of its North American consumer lending unit. The
strategic move is arguably the biggest step in restructuring GE
Capital's portfolio to shield the parent company from intense
market volatilities that plagued the market during the 2008-09
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The North American consumer lending business includes credit
cards to retail giants like Wal-Mart Stores and J. C. Penney
Company. General Electric will sell 20% of this business through
an IPO in 2014. The remaining shares of the unit will be
distributed to the shareholders of the parent company in a
Post-recession, General Electric has been steadily dismantling
its real estate and home loans to strengthen the balance sheet of
GE Capital. Ending net investment or ENI (excluding cash and cash
equivalents) for GE Capital, a measure of its balance sheet,
dropped to $384.6 billion at the end of third quarter 2013 from
$556 billion in 2008. With the divesture, General Electric
anticipates to reduce it further to around $300 billion.
The new entity will operate as a standalone company valued at
about $16 billion to $18 billion, competing with other players in
the industry such as
Discover Financial Services
American Express Company
Capital One Financial Corp.
). The divesture is expected to reduce the total outstanding
shares of the company to approximately 9 billion to 9.5 billion
from 10.12 billion at present.
Strategic Shift in Balance
With the spin-off, General Electric intends to focus more on its
industrial business and expects operating profit to aggregate 65%
of the total operating earnings of the company by 2015. The
company also expects to record a profit of approximately $1
billion from the divesture of its retail fiancé business.
The gradual rebalancing of GE Capital's debt portfolio has
further reduced credit-default swaps tied to debt to 69.9 bps -
the lowest level since Jan 2008. As credit-default swaps
typically decline with an improvement in investor confidence, it
signifies that GE Capital is more creditworthy to derivative
traders at present than it was before. This further offers a
lucrative option to exit the market on a high.
The spin-off will realign the corporate strategy of the company
to a manufacturing-based entity with emphasis on big-ticket items
such as medical equipment and scanners.
General Electric is one of the largest and the most diversified
technology and financial services corporations in the world. With
products and services ranging from aircraft engines, power
generation, water processing, and security technology to medical
imaging, business and consumer financing, media content, and
industrial products, the company serves over 100 million
customers worldwide. Its segments include Power & Water, Oil
& Gas, Energy Management, Aviation, Healthcare,
Transportation, Home & Business Solutions, and GE Capital.
General Electric currently has a Zacks Rank #3 (Hold).