Yesterday, GE announced its plan to form three global public companies focused on the growth sectors of aviation, healthcare, and energy.
Pursuing a tax-free spin-off of GE Healthcare, creating a pure-play company at the centre of precision health in early 2023, in which GE expects to retain a stake of 19.9 percent; and combining GE Renewable Energy, GE Power, and GE Digital into one business, positioned to lead the energy transition, and then pursuing a tax-free spin-off of this business in early 2024. Following these transactions, GE will be an aviation-focused company.
As independently run companies, GE states that the businesses will be “better positioned to deliver long-term growth and create value for customers, investors, and employees”.
Through the transition, GE will be able to monetize its stakes in AerCap and Baker Hughes, prioritising further debt reduction. GE maintains that each of the three resulting independent companies will be well capitalised with investment-grade ratings.
GE Chairman and CEO H. Lawrence Culp, Jr. said: “At GE we have always taken immense pride in our purpose of building a world that works. The world demands—and deserves—we bring our best to solve the biggest challenges in flight, healthcare, and energy. By creating three industry-leading, global public companies, each can benefit from greater focus, tailored capital allocation, and strategic flexibility to drive long-term growth and value for customers, investors, and employees. We are putting our technology expertise, leadership, and global reach to work to better serve our customers.”
Culp continued, “We have a responsibility to move with speed to shape the future of flight, deliver precision health, and lead the energy transition. The momentum we have built puts us in a position of strength to take this exciting next step in GE’s transformation and realize the full potential of each of our businesses.”
The sale of GECAS to AerCap was a major part of GE”s drive to become a simpler, stronger, more focused high-tech industrial company. With the transformation measures taken so far, GE is on track to reduce its debt burden by more than $75bn by the end of 2021, is now on track to bring its net-debt-to-EBITDA ratio to less than 2.5x in 2023. The company also states that it has stabilized insurance and mitigated funding risks through capital contributions of $9.4bn since 2018, and has managed its pension obligations, including funding $8.5bn since 2018 and freezing most pension plans in the US and UK. GE has also strengthened its liquidity and improved cash management, including eliminating on-book factoring, and has also announced a further plan to eliminate remainder of GE’s off-book factoring. GE expects to achieve high-single-digit free cash flow margins in 2023.
Culp will serve as non-executive chairman of the GE healthcare company upon its spin-off. He will continue to serve as chairman and CEO of GE until the second spin-off, at which point, he will lead the GE aviation-focused company going forward.
Peter Arduini will assume the role of president and CEO of GE Healthcare effective January 1, 2022. Scott Strazik will be the CEO of the combined Renewable Energy, Power, and Digital business while John Slattery continues as CEO of Aviation.
Following the spin-off transactions, GE will retain other assets and liabilities of GE today, including run-off insurance operations. Upon closing the Healthcare transaction, GE expects to retain a stake of 19.9 percent in the healthcare company to provide capital allocation flexibility. GE also intends that Healthcare will issue debt securities, the proceeds of which will be used to pay down outstanding GE debt. The transactions are not subject to bondholder consent.
The company expects to incur one-time separation, transition, and operational costs of approximately $2 billion and tax costs of less than $500 million.
Paul, Weiss, Rifkind, Wharton & Garrison is serving as lead legal counsel. Evercore and PJT Partners are the lead financial advisors to GE on the transaction. GE also received legal advice from Gibson, Dunn & Crutcher and financial advice from BofA Securities and Goldman Sachs.