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Asset Sales Will Solidify GE's Financial Position

By Adam Levine-Weinberg – Mar 12, 2018 at 8:20AM

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Worries about General Electric's cash flow and balance sheet will start to subside if GE manages to execute its asset sale plans successfully.

Last quarter, General Electric (GE 0.99%) surpassed its free cash flow forecast by a stunning $2.7 billion, even though EPS barely reached the low end of guidance. Nevertheless, several GE analysts continue to warn investors about the company's weak balance sheet and a potential "cash crunch."

These bearish analysts seem to ignore General Electric's asset sale plans, though. The main goal of slimming down is that a more focused GE would be more likely to achieve strong long-term financial performance. However, there will also be a series of cash windfalls in the next two years or so, which will help the company clean up its balance sheet while maintaining its dividend.

Lining up asset sale deals

GE has already launched the asset sale process. Last September, it agreed to sell its Industrial Solutions unit -- part of its troubled power segment -- to ABB for $2.6 billion. The sale price represents a hefty valuation of 12 times earnings before interest, taxes, depreciation, and amortization.

A large GE Power turbine

GE is selling off pieces of its troubled power business. Image source: General Electric.

It looks like General Electric's iconic lighting division will be the next to go, as the company follows through on a plan to exit its consumer-facing businesses. Last month, GE reached a deal to sell much of its overseas lighting business (along with its automotive lighting unit) to a former executive.

This month, GE began shopping the remainder of its lighting operations, including the key U.S. business. It has attracted interest from at least two Chinese companies, and some of GE's domestic competitors may also bid. The sale could potentially raise about $1 billion.

General Electric also recently hired bankers to market its industrial gas engine business. This piece of the struggling power segment could be worth $2 billion in a sale, according to Reuters.

The biggest asset sales probably won't occur until 2019. Most notably, GE is likely to jettison its entire rail-focused transportation segment. It may also sell part or all of its massive aircraft leasing unit, its healthcare IT business, and other parts of its power business.

A rendering of the Boeing 737 MAX

GE could potentially sell part or all of its aircraft leasing subsidiary. Image source: Boeing.

The Baker Hughes stake will also generate cash

General Electric's 62.5% stake in Baker Hughes, a GE Company (BKR 2.14%) could be another significant source of cash in the next few years.

General Electric has agreed to hold on to its Baker Hughes shares until at least mid-2019. During that time, it will get 62.5% of the cash from any share repurchases by Baker Hughes, without having its stake diluted. Given that Baker Hughes announced a $3 billion share buyback program last fall -- and has billions of dollars of cash on its balance sheet -- the proceeds to GE will be significant.

After the lockup period expires, there's a good chance that General Electric will look to unload its Baker Hughes stake. That stake is currently worth about $21 billion, but its value could rise significantly if oil prices continue to trend higher and Baker Hughes achieves its merger synergy targets. 2019 earnings per share estimates for Baker Hughes cover a wide range from $1.27-$1.95, reflecting analysts' uncertainty about the company's outlook.

If Baker Hughes' EPS is trending toward the upper part of that range, GE's stake could be worth far more than $21 billion by the time the lockup period expires. That will be good for investors, regardless of whether General Electric sells its stake for cash or spins it off to shareholders.

The cash crunch fears are unfounded

Late last year, GE cut its quarterly dividend from $0.24 to $0.12. The company has 8.7 billion shares outstanding, so its dividend now represents an annual cost of $4.2 billion.

General Electric already generates enough free cash flow to cover this payout, even if you exclude parts of the company that are likely to be sold. As a result, GE will be able to put all of its asset sale proceeds toward shoring up its balance sheet. It should be able to dramatically improve its pension funding over the next few years while also reducing its debt.

By the time GE's asset sales start to wind down, the underlying cash flow from its remaining businesses should rebound. Furthermore, General Electric's two big secular growth businesses -- aviation and healthcare -- are likely to drive steady free cash flow growth beyond 2020.

Adam Levine-Weinberg owns shares of General Electric. The Motley Fool is short shares of General Electric. The Motley Fool has a disclosure policy.

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