General Electric Company Expected to Conduct Biggest American IPO Since Facebook

Source: Flickr/Jeffrey Turner

Banking, General Electric (NYSE: GE  ) has discovered, can be a relatively dull business. And it's not really the industrial giant's bread and butter. As a result, "the General" plans to chip away at its banking assets over the next few years. The first segment to hit the chopping block: GE Capital's consumer finance business.

In what is expected to be the largest U.S. initial public offering, or IPO, since Facebook's $16.1 billion debut in May 2012, GE will spin off 20% of its North American retail finance operation, which could fetch roughly $4 billion. Here's why GE shareholders will be cheering every step of the way.

Breaking down the banking biz
Right now, GE's in the middle of a transition toward a leaner manufacturing-focused business that's unencumbered by a massive banking arm. After all, shareholders looking for a bank to invest in have plenty of other options. And there's little reason to believe GE's jack-of-all-trades approach has benefited investors in recent years.

Consequently, GE's cutting ties with small pieces of its relatively large GE Capital segment. From 2008 to 2013, GE Capital's assets have declined by 29%, whereas revenues declined from 38% of GE's total in 2007 to 31% in 2013.

The upcoming IPO spin-off, however, will mark the largest step toward a smaller GE Capital. GE recently referred to it as the "last major action" in the process of reducing GE Capital's contribution to assets and net income. For perspective, here's what GE Capital's total assets and profits look like today across multiple segments. (Mouse over the gray radio buttons to toggle between assets and profits.)

As shown, GE Capital's consumer business is the second largest in terms of assets and by far the largest in terms of profits. The exact percentages are 32% of assets and 46% of profits as of the end of 2013.

Now, GE's not letting go of the entire consumer segment (at least not yet), but specifically has plans to cut ties with a sliver represented by North American retail finance. As reported by the Financial Times, shedding 20% of retail finance could raise approximately $4 billion based on an estimated $20 billion value for the entire operation. This amount would more than double the $1.8 billion raised by Twitter in November of last year.

What exactly would stockholders receive should they purchase shares in the IPO? A piece of a steady lending operation with $53 billion in receivables that generates about half of the consumer segments profits, or roughly $2.2 billion. Those profits have grown from 57% from $1.4 billion at the end of 2010.

To be sure, that growth has tapered off in the past few years, so don't expect this IPO to generate anywhere near the typical IPO hype. GE's retail finance business, in fact, might be the opposite of a high-flying social media or technology start-up operation.

Nevertheless, the IPO will generate some buzz in the financial media simply because of its size. In addition, by 2015, GE expects to part ways with the remaining 80% of the retail finance business, which could set the stage for a much larger initial public offering down the road.

Foolish takeaway
More than a half-decade since the financial crisis, GE is nearing a tipping point where a sizable portion of its banking arm will exit the stage. GE's "banking fiasco," as I've referred to it, is squarely in the rearview mirror.

Hopefully, for shareholders like myself, this will bring a renewed focus to the management team as GE returns to its industrial roots. 

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  • Report this Comment On February 01, 2014, at 6:08 PM, ferdiefor wrote:

    I think the spin out is for consumer; GE is retaining business and commercial lending if I read the blurb correctly. Consumer finance is a terrible place to be now because the new consumer protection bureau will surely raise the cost of consumer borrowing by boring in on those evil bankers that lie cheat and steal from their customers.

  • Report this Comment On February 01, 2014, at 10:59 PM, CAPTDON wrote:

    GE is moving to CHINA and taking your money with them. IPO This must be a" JOKE"

  • Report this Comment On February 01, 2014, at 11:09 PM, djconklin wrote:

    Bailing out of America while the getting is good--after they shipped how many jobs to China?

  • Report this Comment On February 02, 2014, at 1:28 AM, GETRICHSLOW2 wrote:

    Their first step toward improvement should be to fire Immelt. This guy has been one of the worst performing CEO's during his tenure. I don't understand why he is still employed.

    Maybe the board keeps him around because he has obozo in his back pocket.

    I wouldn't touch GE stock right now.

  • Report this Comment On February 02, 2014, at 2:23 AM, xahne wrote:

    so exactly how do we shareholders benefit? do we get offered a discount on the new company shares ?

    I do agree that Immelt should be fired. he pays too much for companies ( buying growth) and then when they don't pan out, sells them at a loss.

    Ge has great potential- like why can't GE come up with a great electric car motor ? the stock would be $100 share if they did that..

    I imagine GE is loaded with old time lifers counting their pension and stock everyday..the executive team cashes their options as soon as they get them and GE has made millionaires out of acquisiton companies..grossly over paying for them ( Lufkin Lift for example)

    I own over 15k shares of GE- still waiting for the company to really do something..I wish I had bought HON at $30 ( I did buy a few sh) but I stuck with GE instead. HON is now $90 /sh GE is still under $30 and going backwards.

  • Report this Comment On February 02, 2014, at 10:34 AM, Smokemout wrote:

    Get rid of Imelt; then split GE up - the parts are worth more than the whole

  • Report this Comment On February 03, 2014, at 4:01 PM, TMFBoomer wrote:

    @xahna

    I believe GE shareholders will benefit because the stock is currently trading at a discount to peers due to the banking overhang. The market pays much less of a premium for any earnings growth associated with GE Capital.

    Needless to say, I too believe GE has the potential to come up with something a bit more radical and consumer-facing. A best-in-class electric motor? Why not?

    I've thought about that idea a bit myself! They're working on all of the elements - charging stations, the smart grid, natural gas turbines, wind/solar, etc. Why not invest in a game-changing electric car!?

    Props to Tesla and all, but aside from Musk's operation I think GE could out-engineer most other car companies, not to mention the end-to-end expertise they have to support infrastructure, etc. But that's just my two cents.

    Isaac

    @TMFBoomer

  • Report this Comment On February 25, 2014, at 9:30 AM, Haise wrote:

    GE shareholders also receive shares in the consumer lending spinoff tax free, if I'm understanding correctly.

    Any thoughts on whether they financial side will be a takeover target or make some acquisitions of its own? Or what the industrial side will do with the cash?

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