General Electric is finally putting the ghost of its former chief executive Jack Welch out to pasture. On Friday, the conglomerate said it intended to spin off its North America retail finance business. That will help return GE Capital to its roots of lending to midmarket companies and its parent’s industrial concerns.
The current chief executive, Jeff Immelt, will take his time in getting rid of the division, which houses private-label credit cards, health care and veterinary finance and some consumer loans. First, GE Capital intends to sell about a fifth of the business through an initial public offering next year, using the proceeds to build up the unit’s capital as a standalone company. It’ll then spin off the rest to General Electric shareholders in 2015.
The move will hit earnings. The consumer finance business is expected to contribute $2.2 billion to the bottom line this year, according to General Electric â€" 13 percent of the conglomerate’s net income as forecast by analysts. GE Capital expects to have to cut costs, be more efficient with its balance sheet and grab new business to keep the return on tangible common equity at last quarter’s annualized level of 15 percent.
The benefits, though, should shine through. First, earnings per share won’t fall too much, if at all, as the planned 2015 exchange of stock in the new company for outstanding General Electric shares will reduce General Electric’s share count. Without the volatile consumer business, earnings should be steadier, and GE Capital’s share of overall earnings will shrink to about 30 percent. Moreover, the finance-related divisions that will remain are better aligned with the company’s industrial units.
The more General Electric focuses on those core businesses, the more likely it is that investors will value the company as an industrial powerhouse rather than applying a discount for the businesses in the financial sector, which commands a much lower multiple. That should mean a boost for shareholders.
GE Capital can do more still: Even after the spinoff, almost a quarter of its leases will remain consumer-related. And its real estate portfolio remains a drag, though things are improving. It has taken Mr. Immelt 12 years to get to this point. But at least he’s finally ending the mission creep that started under Mr. Welch.
Antony Currie is an associate editor at Reuters Breakingviews. For more independent commentary and analysis, visit breakingviews.com.
