If you were concerned about where General Electric (NYSE:GE) was heading, you weren't alone. Plenty of top analysts, commentators, and stock market wonks have been anxiously watching the troubled industrial conglomerate and its new CEO, Larry Culp, for signs the company's woes are behind it.
Well, on Monday came the moment everybody was waiting for, as Culp announced a surprise plan to sell the company's biopharma business to his former company Danaher (NYSE:DHR). The stock shot up on news of the deal, but there were some other hidden gems in the company's press release that should make investors feel even more secure that GE may -- at long last -- be stabilizing.
What's the big deal
In June 2018, then-CEO John Flannery announced that GE was going to spin off GE Healthcare, the company's well-run healthcare unit. This was a double-edged sword for investors, as GE Healthcare had some of the best margins of any unit in the company -- only standout GE Aviation's were higher. Spinning it off meant that those margins -- not to mention the unit's assets -- would be gone forever.
But GE planned to load up the healthcare unit with debt and pension liabilities prior to the spinoff, which would put GE in a stronger financial position as those items came off its balance sheet. Also, now that GE has gotten rid of (or announced plans to get rid of) its appliances, consumer lighting, and oil and gas units, Healthcare no longer fit with what the rest of the company was doing: manufacturing turbines of various types.
On Monday, though, those plans were upended. GE will now sell its biopharma unit, which manufactures equipment and software necessary for companies to research, develop, and manufacture biopharmaceutical drugs -- which, to be honest, is some really cool stuff. The unit takes in about $3 billion in annual revenue (about 15% of GE Healthcare's total), which leaves a lot of GE Healthcare untouched by the deal.
Why it's a big deal
The buyer is Danaher, another industrial conglomerate, which was helmed by Culp from 2001-2014. Since his departure, Danaher has been reinventing itself by spinning off or selling some of its industrial businesses and acquiring biotech companies. For example, in 2016, Danaher spun off some 20 of its businesses, including measurement instruments and automotive equipment as Fortive, while acquiring molecular diagnostics company Cepheid, Inc. In 2018, it announced it would acquire Integrated DNA Technologies. So GE's biopharma unit should feel right at home with its new parent.
For GE's part, it gets $21 billion in cash, which it will use to help pay down its $110 billion net debt load. Danaher will also acquire $400 million of GE's pension liabilities, which further helps GE's balance sheet. And at a sale price of just over 7 times annual revenue, there's little question that the price is right. That eases some concerns that GE was going to have to resort to fire-sale pricing as it unloaded its assets.
And GE still gets to retain the remainder of its outperforming Healthcare unit, which it can then spin off as planned, sell off piecemeal, or hang on to. Despite some initial reporting that the spinoff was definitely off the table, Culp clarified to CNBC that it's simply being re-evaluated, but that "an IPO in 2019 looks unlikely at this point."
So, the deal itself is big for both companies, but in the press release announcing it, GE also addressed two other big concerns that investors have had about GE: planning and transparency.
Check out the latest GE earnings call transcript.
An even bigger deal
Up until now, Culp has been reluctant to provide any specifics about what he has in mind for GE's future, beyond big-picture pronouncements like the need for "strengthening the businesses, starting with [GE's troubled unit] Power," and the need for the company to reduce debt.
In general, Culp has been less forthcoming than his predecessor, Flannery, who at this point in his tenure had already presided over a few non-earnings conference calls and who -- along with CFO Jamie Miller -- had made presentations at several industrial conferences.
But in the press release announcing the deal, GE also announced that Culp would make a presentation in just over a week at the J.P. Morgan Aviation, Transportation & Industrials conference on March 5, his first such appearance as CEO. J.P. Morgan analyst Steve Tusa has been one of the most vocal GE bears and is expected to lead the Q&A session with Culp, so this seems to represent a big step forward in the company's willingness to answer tough questions.
Additionally, GE has scheduled a "teach-in" conference call for March 7 to address the company's insurance situation, which has been causing so many headaches for the company over the past year. Then it plans to issue the company's outlook on a March 14 conference call, and five days later, CFO Miller will make her first presentation during Culp's tenure at the Bank of America Merrill Lynch Global Industrials and EU Autos conference.
After three months of near-complete radio silence, this flood of information and interaction seems to indicate the company has heard the critiques and is determined to address them head-on.
Turning the corner
The most concerning thing in the four months since Flannery's abrupt ouster and Culp's ascent to the C-suite has been what seemed like the lack of a concrete plan beyond what Flannery had shared in June 2018. While this biopharma deal is big, investors should pay more attention to all of the information the company will be sharing through mid-March, and see if it meets with their approval. Remember, it's still completely possible that this deal is being announced in advance of an abysmal 2019 outlook. So it may be premature to say that GE has definitely turned the corner.
Two weeks ago, after GE's fourth-quarter earnings report, I wrote, "Maybe Culp is going to pull the rabbit out of the hat and surprise everyone with a strategic masterstroke." At the time, I considered the prospect unlikely, but even this GE bear has to admit that Monday's revelations should go a long way toward improving GE investors' confidence in the company and its management.