Over the past decade, General Electric (GE -1.80%) has gradually simplified its operations, selling or spinning off a slew of non-core businesses.

Now, the storied industrial conglomerate has decided that it doesn't want to be a conglomerate anymore. On Tuesday, GE announced plans to split into three separate publicly traded companies, each focused on a single market. Here's why that could unlock big gains for GE stock over the next few years.

An old plan, with a twist

Back in June 2018, General Electric announced that it would sell a roughly 20% stake in its healthcare business via an initial public offering (IPO), while spinning off the rest to GE shareholders. At that time, the company also told investors that it intended to gradually monetize its majority stake in oil services giant Baker Hughes.

These moves were part of a broader plan by GE to address its crushing debt load. In addition to reaping cash proceeds of $20 billion or more from selling its stakes in Baker Hughes and the healthcare unit, General Electric planned to transfer $18 billion of debt and pension liabilities to the healthcare business as part of the spinoff.

A person's hand holding an ultrasound device.

Image source: Getty Images.

GE has gone ahead with the plan to sell down its stake in Baker Hughes. It expects to sell the last of those shares by 2023. By contrast, in early 2019, the company shelved its plan to spin off the healthcare division after reaching a deal to sell its biopharma unit (a small but fast-growing and ultra-profitable piece of GE Healthcare) to Danaher for approximately $21 billion.

This week's announcement revives the plan to spin off GE's healthcare unit as a standalone public company. But in a change from the 2018 plan, General Electric now plans to combine its power, renewable energy, and digital businesses and spin those off, too. That will leave GE as an aviation pure play.

Digging into the details

As the first step in this breakup, General Electric expects to spin off the healthcare business in early 2023. The new healthcare company will issue debt -- the amount hasn't been determined yet -- and GE will use the proceeds to repay some of its corporate debt. Additionally, GE will retain a 19.9% stake in the healthcare unit that it can sell over time to raise additional capital for debt reduction or other strategic aims.

Meanwhile, GE will work through the process of combining its power, renewable energy, and digital units to prepare them for a stand-alone future. That should enable it to spin off this new energy-focused company in early 2024. The aviation business will inherit legacy liabilities like GE's run-off insurance business as well as the company's remaining stakes in Baker Hughes and AerCap.

A jet in the GECAS livery.

Image source: General Electric.

GE expects about $2 billion of one-time separation costs and less than $500 million of tax liabilities in order to split into three public companies. Importantly, though, management does not expect any long-term dyssynergies. Savings from removing the conglomerate's corporate overhead should fully offset the incremental costs that the healthcare and energy businesses will incur as independent companies.

Unleashing the potential of the aviation and healthcare businesses

General Electric's healthcare business posted solid results throughout the pandemic, and the aviation unit's recovery is starting to accelerate. That makes it a great time to split GE into separate aviation, healthcare, and energy companies.

Breaking up a conglomerate often leads to better fundamental performance for the successor companies. The management teams of each company can better focus on the key drivers of that business. Moreover, it is easier to design incentive compensation schemes to reward strong performance for an independent company than for a subsidiary.

Additionally, GE's business segments have very different financial profiles. As a result, GE stock has typically traded at a discount to the sum of its parts. In particular, the energy businesses have lower margins and collectively have less growth potential than GE's aviation and healthcare units. Their inconsistent results and slow turnarounds have weighed on GE stock's performance for years.

Based on its consistently strong results and growth prospects, GE's healthcare business is likely to achieve a high valuation as an independent company. And by 2024, GE Aviation will be firing on all cylinders, meriting a high valuation, too. Together, they are worth more than GE's current enterprise value, implying that GE stock should rise as the company starts to implement its breakup plan. Any value shareholders get from the energy spinoff would just be gravy.