General Electric Co will shed most of its finance unit and return as much as $90 billion to shareholders as it becomes a "simpler" industrial business instead of an unwieldy hybrid of banking and manufacturing.
The company on Friday outlined a restructuring plan that includes buying back up to $50 billion of its shares, selling about $30 billion in real estate assets over the next two years and divesting more GE Capital operations. GE stock jumped 8.5 percent.
"The stock has been under-owned by institutional investors, and that's going to change now," said Tom Donino, co-head of equity trading at First New York Securities.
The repurchase program, which will be partly funded by $35 billion through money returned from GE Capital, is the second-biggest in history after Apple Inc's $90 billion plan. GE, which had 10.06 billion shares outstanding on Jan. 31, said it expected to reduce that by as much as 20 percent to 8 billion to 8.5 billion by 2018.
In all, GE said it planned to shed $275 billion in GE Capital assets. That includes the previously announced spinoff of its Synchrony Financial credit card unit, the real estate transaction announced on Friday, and future sales of commercial lending and consumer banking businesses with assets of about $165 billion.
The company plans to keep $90 billion in finance assets directly related to selling its products such as jet engines, medical equipment and power generation and electrical grid gear.
GE has forecast earnings of $1.70 to $1.80 per share for this year, including 60 cents from GE Capital, but expects profit to be "substantially higher" in 2018, executives said on a conference call with analysts. Shrinking GE Capital will reduce earnings by 25 cents per share, they said, but the stock buybacks should offset that impact.
The company already had a significant number of inquiries about GE Capital units before Friday's announcement, said Keith Sherin, the finance unit's chief.
Blackstone Group LP and Wells Fargo & Co confirmed that they were buying most of the assets of GE Capital Real Estate for about $23 billion.
This is the biggest deal in the commercial property market since Blackstone's acquisition of office landlord Equity Office Properties Trust in 2007 for $39 billion, including debt.
FOCUS ON INDUSTRIAL
The moves announced on Friday will dramatically reduce GE's exposure to lending and other financial businesses.
GE Chief Executive Officer Jeff Immelt told investors the company would try to generate 90 percent of its profits from industrial operations by 2018. He had previously forecast that share would grow to 75 percent by 2016 from 55 percent in 2013.
"We just think the market timing is very good vis-a-vis the value of financial service assets," Immelt said in an interview. "There have been moments in the past when there weren't a lot of buyers. Now there are."
Immelt and other GE executives said they planned to spend $3 billion to $5 billion a year on industrial acquisitions.
GE said it could return up to $90 billion to investors through a combination of dividends, the $50 billion in share buybacks, and completion of the Synchrony spinoff planned for late this year.
Executives gave several reasons for GE's accelerated retreat from financial businesses. One is that since the financial crisis, it has become more difficult for GE to fund its lending operations.
GE funded many of its loans and leases by borrowing money from bond markets. During the financial crisis it lost access to that funding, bringing it uncomfortably close to running out of cash.
Lenders like GE Capital and CIT Group Inc, which cannot rely on bank deposits to fund their assets, have had to rethink the way they do business since the crisis. Many decided to either shed assets or become banks.
GE Capital's size and the potential risks in its lending portfolio made it subject to government regulation as a systemically important financial institution. GE said it would apply to escape that oversight in 2016 as it reduces the financial business' size.
GE said it would take after-tax charges of about $16 billion for the restructuring in the first quarter, of which about $12 billion would be non-cash.
Shares of GE were sluggish for the past year despite previous moves to reposition itself around the industrial businesses. Still, Friday's more dramatic move away from finance caught some analysts by surprise.
"What we did not expect was the speed with which management would move to undertake this transformation," Sanford Bernstein analyst Steven Winoker wrote. "We view today's announcement as an overwhelming positive for the company."
During the conference call, Barclays analyst Scott Davis told executives that while he had been a critic, "this is good stuff ... I guess you can keep your jobs a little longer."
JPMorgan Chase & Co and Centerview Partners provided general financial advice to GE, while Bank of America Corp and Kimberlite Advisors advised on the real estate deal. Eastdil Secured and Wells Fargo Securities were advisers to Blackstone and Wells Fargo.
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