What happened
Shares of General Electric (GE 1.49%) bounced around today, initially falling more than 5% in the morning before ending the day down 1.68%.
So what
At last report, GE was carrying a bit more than $94 billion in net debt, and had only about $14.5 billion in cash on hand with which to service it. Last month, however, the company received permission from the Federal Trade Commission to proceed with its sale of its BioPharma business to Danaher (DHR 1.74%) for about $21 billion.
This sale has now closed. And today, General Electric CEO Larry Culp announced:
[W]ith net proceeds of about $20 billion from the sale of BioPharma now in hand, we are taking swift actions to de-risk and de-lever our balance sheet and prudently manage our liquidity amid a challenging external environment. We continue to execute on our priorities, including solidifying our financial position by further reducing debt and improving our cash operations and management. We remain committed to achieving our leverage goals over time.
Image source: Getty Images.
The company plans to use part of the proceeds from the GE BioPharma sale to pay off about $9 billion worth of debt, and will also issue new debt with which to buy back and pay off certain bonds issued by its industrial subsidiaries. Although these bond buybacks will not decrease the total amount of money owed, GE says it does hope to extend the period for maturity of much of its debt by replacing old bonds with new ones.
Now what
Were GE to spend the entire proceeds of its GE BioPharma sale on paying back debt, and all of its cash on hand as well, the company would still end up with a debt load of nearly $60 billion. That's quite a burden to be carrying into the teeth of a global pandemic and global recession. Nevertheless, the company's ability to use the cash it has available to juggle its debt around and postpone when debt comes due means it has a better chance of waiting out the recession, and paying off its obligations once the business environment improves.
Net-net, that seems a positive in my book. Investors who sold off GE stock early in the day may have missed this point. With GE still generating $3 billion annually in free cash flow (not counting whatever damage the coronavirus is now wreaking), and the debt picture now looking more manageable, GE looks like a better bet to me today than it did as recently as Friday.
