Tags: GE | SpinOff | Finance | Unit

GE: No Plans to Spin Off Finance Unit

Wednesday, 20 March 2013 06:41 PM

General Electric Co. distanced itself from a report that it might consider spinning off the finance unit, a move that would eliminate the source of half its profit.

Dow Jones reported earlier Wednesday that Chief Executive Officer Jeffrey Immelt told business leaders in Sydney that he’d “never say never” about a spinoff of GE Capital Corp., which provided 50 percent of its parent’s profit last year. Immelt never implied a spinoff was under consideration, said Russell Wilkerson, a GE spokesman.

“As Jeff clearly stated, there are no plans to split off GE Capital from the parent company,” Wilkerson said in an e- mail. His comments were taken out of context in the Dow Jones report, Wilkerson said.

Immelt has been shrinking GE Capital since the financial crisis, when credit losses at the unit mounted and its access to money markets withered, imperiling the entire company. Ending net investment, a measure of the division’s assets, shrank to $419 billion as of Dec. 31, an 18 percent decline since the beginning of 2009, GE has said.

GE Capital had 2012 profit of $7.4 billion, compared with its parent’s $14.7 billion in earnings from continuing operations, the company said in January.

Stock Valuation

A Dow Jones spokeswoman said the story framed Immelt’s comments correctly.

“Both the headline and the story give the proper context around the CEO’s comments, citing there are no current plans to pursue a spinoff of GE Capital,” said Colleen Schwartz.

Cutting ties with the finance division would hurt GE shareholders instead of benefiting them because the Fairfield, Connecticut-based company trades at a price that’s higher than its value if broken up, Jeff Sprague, an analyst at Vertical Research, wrote today in a note to clients.

“The company is being rewarded in a sense for being constituted in its current configuration,” Sprague said in a telephone interview. “It might sound good in theory but it’s just not a good idea to split the company given where the valuation is.”

Selling or spinning off parts of GE Capital, such as its private-label credit card business or real estate holdings, would be beneficial to shareholders because they “have no place” in the unit’s portfolio, Sprague said in the note.

Support Pact

Further complicating a potential spinoff is a 1991 agreement that requires GE to provide financial support to GE Capital if its earnings were to fall to levels that threaten its ability to cover its obligations. A 2009 amendment further strengthened the pact by requiring majority support among GE Capital bondholders to split off the unit.

GE shares rose 0.6 percent to $23.46 at the market close in New York, compared with a 0.7 percent gain for the Standard & Poor’s 500 Index.

The cost to protect GE Capital’s debt against losses with credit default swaps climbed 6 basis points to 99.1 basis points at 4:04 p.m. New York time, according to Bloomberg prices. It earlier widened as much as 8 basis points in the biggest gain since September. A basis point equals $1,000 annually on a contract safeguarding $10 million of debt.

Credit-default swaps on individual names with investment- grade ratings such as GE Capital, which rise as investor confidence deteriorates and fall as it improves, rolled to new versions Wednesday. The swaps are created every six months to add time to the contract. Longer-dated contracts are typically higher.

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General Electric Co. distanced itself from a report that it might consider spinning off the finance unit, a move that would eliminate the source of half its profit.
Wednesday, 20 March 2013 06:41 PM
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