November 11, 2021

Breakingviews: GE breakup is common sense, at least in theory

by Breakingviews.

Larry Culp has described his management style as chief executive of General Electric as “common sense, vigorously applied.” His plan to break the company into three listed parts, unveiled on Tuesday, looks like common sense, belatedly applied.

The 119-year-old GE will hive off its healthcare-equipment business in 2023, and then spin off its power and renewable energy division a year later. That will leave the jet engine business, which contributes more than half of GE’s operating profit – and which Culp will continue to run. One sprawling company will become three more focused ones.

Under earlier GE bosses like Jack Welsh and Jeff Immelt, this would have been unthinkable. But Culp has already spent three years cleaning GE up. And what’s left could in theory be worth more broken up. By GE’s own targets the aviation business could generate $6 billion of operating profit by 2023. Valued at the same 20-times multiple as peers Honeywell and Safran, it’s worth $120 billion. The healthcare business, assuming $3.5 billion of operating profit valued at the same 25-times multiple as Siemens Healthineers, is worth nearly $90 billion.

Already, that $210 billion beats GE’s current enterprise value of around $160 billion, ignoring its barely profitable power and renewables unit. Apply the uplift to the company’s roughly $120 billion equity value as of Monday, and shareholders could see gains of more than 40% over a few years after decades of stock-market underperformance. A breakup could even open up future deals. GE’s failed tie-up with Honeywell two decades ago could theoretically make sense one day, with GE’s aviation business as the target.

Similar logic led Japanese conglomerate Toshiba to say on Monday that it might divide itself into three. On paper, it’s common sense. The reality can, however, fall short in value terms, as demonstrated by the disappointing three-way split of DowDuPont after its creation through a merger.

Other obstacles include GE itself. The company has a habit of missing targets, from the slow-motion sale of its lightbulb business to its goal of getting net debt down to 2.5 times EBITDA, which GE now says it will achieve in 2023 – five years after former boss John Flannery promised it by 2020. Flannery also pledged to spin off the healthcare division but didn’t. Investors should be happy when GE CEOs do what they say. History shows it’s less impressive when they say what they’ll do.

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