General Electric Company's (GE - Analyst Report) second-quarter 2014 results reflected the company’s greater focus on its industrial operations, as the conglomerate looks to further stimulate its shift away from the financial business. Management has decided to initiate a $3 billion initial public offering (IPO) of Synchrony Financial, its North American consumer finance business.
The move is a part of the company’s long-term strategy to shrink its financial arm, GE Capital, which it has been striving to do since the credit markets froze in the financial crisis.
According to a regulatory filing, General Electric plans to raise about $3 billion from the IPO of its credit card unit. The divested unit, Synchrony Financial, is looking to be listed following the July IPO and will trade under the ticker “SYF.”
Per the filing, General Electric intends to float 20% of Synchrony Financial in the IPO. The remaining 80% will be held by the conglomerate, to be reportedly spun off in a tax-free share exchange with its shareholders in 2015.
In the SEC filing, the company outlined its intent to offer 125 million shares of Synchrony Financial for $23 to $26 per share. The company has also granted underwriters the option to buy additional 18.75 million shares for over-allotment.
The company will use the proceeds to repay debt and increase its capital. The Goldman Sachs Group, Inc. (GS - Analyst Report), JPMorgan Chase & Co. (JPM - Analyst Report), Citigroup Inc. and Morgan Stanley are acting as managers of the offering.
Synchrony Financial handles store credit cards for major retailers like Gap, Walmart and JC Penney. Valued at over $3 billion, the IPO presents itself as the largest by a U.S. company this year so far, trumping the $2.6 billion offering by Ally Financial Inc. (ALLY - Analyst Report) in April.
GE’s Repositioning Strategy
General Electric has long been attempting to reduce its reliance on financial profits, while aligning its portfolio toward core industrial operations. At its height, the conglomerate’s financial arm GE Capital, accounted for just under half of the revenues. In the second quarter, GE Capital contributed about 43% of the company’s profits.
General Electric’s impressive growth in earnings for second-quarter 2014 was largely driven by the robust performance of its industrial segment. While the industrial segment recorded 7% year-over-year revenue growth, GE Capital’s total revenues declined 6% year over year, in sync with the company’s strategy. (Read: General Electric Q2 Operating Earnings in Sync, Revs Up)
The conglomerate now aims to downsize GE Capital such that it accounts for just 25% of its profits by 2016. Divestiture of Synchrony Financial is a critical step in the repositioning of its portfolio toward its industrial roots.
The IPO comes on the heels of General Electric’s successful bid to acquire the energy assets of French conglomerate Alstom for $13.5 billion. Per the deal, the U.S. giant will buy the grids, off-shore wind and hydro operations, and nuclear and steam businesses of its French counterpart. (See: GE Wins Alstom Board Approval; Govt Seeking 20% Stake)
The Alstom deal, fraught with political drama and bidding combat, is General Electric’s biggest acquisition to date. Likely to close in 2015, the acquisition is expected to be accretive to 2016 the company’s earnings by 6-9 cents per share. The deal promises excellent return potential, supply chain efficiencies and deep synergies.
The conglomerate, as it sheds its financial assets on one hand and strengthens its core industrial operations on the other, looks poised to spur long-term growth.
General Electric presently holds a Zacks Rank #3 (Hold).