Taking a Closer Look at General Electric's Synchrony Spin-Off

General Electric has some pretty complicated transactions recently. Here's a look at details surrounding its Synchrony Financial IPO coming soon.

Jul 21, 2014 at 6:05PM

It's shaping up to be one heck of a busy year for America's largest industrial company, General Electric (NYSE:GE). Not only did the conglomerate recently make one of its largest acquisitions in company history -- the largest when unadjusted for inflation -- when it acquired assets from Alstom, but it's about to take the first step in spinning off a sizable chunk of its retail finance business, Synchrony Financial. It would be difficult to summarize these complicated moves in a few words, to be sure.

"We are boldly reshaping the company," GE CEO Jeffrey Immelt said during a conference call.

Touche, Mr. Immelt. Apparently, it's more difficult to understand these strategic moves on paper than it is to summarize them, so let's take a closer look at the details surrounding its Synchrony Financial spin-off.

What is Synchrony Financial, exactly?
Most investors are up to speed with the majority of General Electric's industrial businesses, but what's under GE Capital's umbrella is a bit more mysterious. That's because the company's financial division has its hand in many different cookie jars, some more risky than others.

Part of GE Capital provides cash flow and loans to mid-size and large U.S. businesses trying to expand as well as sometimes funding GE's own growth, acquisitions, or balance sheet optimization. Now, it's important to know that this part of GE Capital won't be included in the Initial Public Offering (IPO), which will become Synchrony Financial, later this month.

The part involved in the IPO is a lending arm within GE Capital that focuses on credit card receivables. Synchrony's business generates its revenue through three platforms: Retail Card, Payment Solutions, and CareCredit. The majority of the revenue comes from the first platform, Retail Card, where it partners up with large retailers that often bug shoppers to sign up for their private label credit card while checking out at the register.

To give you an idea of what these partnerships generate, consider that between 24 partnerships, the credit cards generated $75 billion in purchase volume last year alone. Synchrony collected over $8.3 billion on interest and fees on those loans, before deducting for retailer share arrangements with its partners. It's profitable, to be sure, but it doesn't fit with GE's new focus on industrial business. For that reason, GE will spin the business off in the previously mentioned IPO.

By the numbers, GE is looking to spin off roughly 15% of Synchrony Financial for about 125 million shares, valued at roughly $24.50 as a midpoint of the estimated price range. GE hopes to raise a little more than $3 billion during the first part of its spin-off, and it values the entire company at roughly $20 billion.

Now, with a better understanding of what Synchrony is and how it generates revenue, and what it's worth as an IPO, here's what the spin-off means for General Electric investors.

Less of the nasty
The finance industry can be a risky and volatile business, as General Electric found out in 2008 when the financial collapse nearly brought GE to its knees. GE spinning off Synchrony will leave less risky finance operations, and it will make the company more stable as it refocuses on its industrial business roots.

In fact, roughly a year ago, GE Capital Corporation became one of the first two nonbanks to be designated as "systemically important" by the Financial Stability Oversight Council (FSOC). It was a move to address threats to the U.S. financial stability, and it raised a few eyebrows of some risk-adverse GE investors. As GE reduces the risk and volatility of its finance arm, many investors will breathe a sigh of relief.

Also, as GE continues to push its industrial business segment to generate 75% of earnings as soon as 2016 -- a reversal of GE Capital being responsible for more than half of profits before the recession -- it should boost the price-to-earnings ratio GE will trade at because industrial assets are generally viewed by investors as more valuable than financial assets.

One common question surrounding the IPO of Synchrony is simply: Why the spin-off? Why not sell the company for a faster cash transaction? The reason comes down to tax purposes. With a large, albeit faster, cash transaction process, there would be a hefty tax bill for GE and its investors. After GE spins off the first roughly 15% of Synchrony, the second part, when the rest will be spun off, will save a considerable amount on taxes because investors will be offered a tax-free swap of GE shares for Synchrony shares.

Bottom line
Another thing for investors to consider is the timing of this IPO. The IPO market has been hot, and GE seems to be striking its IPO at the right time to maximize its value. The spin-off also comes at a time when many analysts are predicting economic growth to continue and consumer spending to pick up, which would benefit Synchrony.

Ultimately, GE is returning to its core industrial roots and will continue focusing on its high-margin businesses in that segment, while de-risking its GE Capital business. As GE spins off Synchrony Financial at a good time to maximize its value, continues to acquire companies and grow organically, it should emerge from its bold reshaping as a much more shareholder-friendly company for potential investors.

Top dividend stocks for the next decade
The smartest investors know that dividend stocks simply crush their non-dividend paying counterparts over the long term. That's beyond dispute. They also know that a well-constructed dividend portfolio creates wealth steadily, while still allowing you to sleep like a baby. Knowing how valuable such a portfolio might be, our top analysts put together a report on a group of high-yielding stocks that should be in any income investor's portfolio. To see our free report on these stocks, just click here now.

Daniel Miller has no position in any stocks mentioned. The Motley Fool owns shares of General Electric Company. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

1 Key Step to Get Rich

Our mission at The Motley Fool is to help the world invest better. Whether that’s helping people overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we can help.

Feb 1, 2016 at 4:54PM

To be perfectly clear, this is not a get-rich action that my Foolish colleagues and I came up with. But we wouldn't argue with the approach.

A 2015 Business Insider article titled, "11 websites to bookmark if you want to get rich" rated The Motley Fool as the #1 place online to get smarter about investing.

"The Motley Fool aims to build a strong investment community, which it does by providing a variety of resources: the website, books, a newspaper column, a radio [show], and [newsletters]," wrote (the clearly insightful and talented) money reporter Kathleen Elkins. "This site has something for every type of investor, from basic lessons for beginners to investing commentary on mutual funds, stock sectors, and value for the more advanced."

Our mission at The Motley Fool is to help the world invest better, so it's nice to receive that kind of recognition. It lets us know we're doing our job.

Whether that's helping the entirely uninitiated overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we want to provide our readers with a boost to the next step on their journey to financial independence.

Articles and beyond

As Business Insider wrote, there are a number of resources available from the Fool for investors of all levels and styles.

In addition to the dozens of free articles we publish every day on our website, I want to highlight two must-see spots in your tour of fool.com.

For the beginning investor

Investing can seem like a Big Deal to those who have yet to buy their first stock. Many investment professionals try to infuse the conversation with jargon in order to deter individual investors from tackling it on their own (and to justify their often sky-high fees).

But the individual investor can beat the market. The real secret to investing is that it doesn't take tons of money, endless hours, or super-secret formulas that only experts possess.

That's why we created a best-selling guide that walks investors-to-be through everything they need to know to get started. And because we're so dedicated to our mission, we've made that available for free.

If you're just starting out (or want to help out someone who is), go to www.fool.com/beginners, drop in your email address, and you'll be able to instantly access the quick-read guide ... for free.

For the listener

Whether it's on the stationary exercise bike or during my daily commute, I spend a lot of time going nowhere. But I've found a way to make that time benefit me.

The Motley Fool offers five podcasts that I refer to as "binge-worthy financial information."

Motley Fool Money features a team of our analysts discussing the week's top business and investing stories, interviews, and an inside look at the stocks on our radar. It's also featured on several dozen radio stations across the country.

The hosts of Motley Fool Answers challenge the conventional wisdom on life's biggest financial issues to reveal what you really need to know to make smart money moves.

David Gardner, co-founder of The Motley Fool, is among the most respected and trusted sources on investing. And he's the host of Rule Breaker Investing, in which he shares his insights into today's most innovative and disruptive companies ... and how to profit from them.

Market Foolery is our daily look at stocks in the news, as well as the top business and investing stories.

And Industry Focus offers a deeper dive into a specific industry and the stories making headlines. Healthcare, technology, energy, consumer goods, and other industries take turns in the spotlight.

They're all informative, entertaining, and eminently listenable ... and I don't say that simply because the hosts all sit within a Nerf-gun shot of my desk. Rule Breaker Investing and Answers contain timeless advice, so you might want to go back to the beginning with those. The other three take their cues from the market, so you'll want to listen to the most recent first. All are available at www.fool.com/podcasts.

But wait, there's more

The book and the podcasts – both free ... both awesome – also come with an ongoing benefit. If you download the book, or if you enter your email address in the magical box at the podcasts page, you'll get ongoing market coverage sent straight to your inbox.

Investor Insights is valuable and enjoyable coverage of everything from macroeconomic events to investing strategies to our analyst's travels around the world to find the next big thing. Also free.

Get the book. Listen to a podcast. Sign up for Investor Insights. I'm not saying that any of those things will make you rich ... but Business Insider seems to think so.

Compare Brokers