January 17, 2018

Breakingviews: GE’s Legacy Losses Reinforce Case for Breakup

by Breakingviews.

General Electric’s profligate past is haunting its future. A fresh $6.2 billion post-tax charge relating to reinsurance – a business the company exited over a decade ago – shows the challenge of managing a conglomerate. As Chief Executive John Flannery struggles to reshape the $163 billion outfit, it’s another reason to consider a breakup.

In the 1980s and 1990s, legendary boss Jack Welch built GE Capital, the finance unit, into a behemoth that threatened to overwhelm the group’s industrial operations. Jeff Immelt, who took over from Welch and recently handed the torch to Flannery, pruned the financial-services arm aggressively after the 2008-09 financial crisis.

GE sold or spun off its reinsurance operations between 2004 and 2006 but remained on the hook for certain risks, including long-term care policies. With people living longer and healthcare costs continuing to rise, that exposure has climbed sharply. Hence the latest hit to earnings and the company’s plan to bolster its insurance reserves by $15 billion over seven years.

The “deeply disappointing” charge, as Flannery put it on Tuesday, raises the question of whether time bombs lurk elsewhere. GE Capital last year suspended dividends to its parent, which had been projected at some $4 billion over 2017 and 2018. Flannery says the subsidiary can finance itself, but with the charge boosting its debt-to-equity ratio to 7.1 times from 4.6 times, the risk is now that it could become a drain on the group.

With GE’s stock down more than 3 percent by midday, its decline over the past 12 months totals 42 percent, compared with a 23 percent gain for the S&P 500 Index. The slide has wiped more than $110 billion off the market capitalization of what was the world’s most valuable company at the turn of the century.

Flannery says he’s considering all options. Separating businesses prevents them endangering each other, making a breakup or separate listings for the group’s power, healthcare and aviation businesses a serious possibility. GE took a step in that direction last year by merging its oil and gas division with Baker Hughes. Yet analysts at Cowen reckon GE’s parts are worth no more than $15 a share, less than its current stock price, making the financial benefits questionable. For Flannery, breaking up may be hard to do.

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