Banking, General Electric (NYSE:GE) has discovered, can be a relatively dull business. And it's not really the industrial giant's bread and butter. As a result, "the General" plans to chip away at its banking assets over the next few years. The first segment to hit the chopping block: GE Capital's consumer finance business.
In what is expected to be the largest U.S. initial public offering, or IPO, since Facebook's $16.1 billion debut in May 2012, GE will spin off 20% of its North American retail finance operation, which could fetch roughly $4 billion. Here's why GE shareholders will be cheering every step of the way.
Breaking down the banking biz
Right now, GE's in the middle of a transition toward a leaner manufacturing-focused business that's unencumbered by a massive banking arm. After all, shareholders looking for a bank to invest in have plenty of other options. And there's little reason to believe GE's jack-of-all-trades approach has benefited investors in recent years.
Consequently, GE's cutting ties with small pieces of its relatively large GE Capital segment. From 2008 to 2013, GE Capital's assets have declined by 29%, whereas revenues declined from 38% of GE's total in 2007 to 31% in 2013.
The upcoming IPO spin-off, however, will mark the largest step toward a smaller GE Capital. GE recently referred to it as the "last major action" in the process of reducing GE Capital's contribution to assets and net income. For perspective, here's what GE Capital's total assets and profits look like today across multiple segments. (Mouse over the gray radio buttons to toggle between assets and profits.)
As shown, GE Capital's consumer business is the second largest in terms of assets and by far the largest in terms of profits. The exact percentages are 32% of assets and 46% of profits as of the end of 2013.
Now, GE's not letting go of the entire consumer segment (at least not yet), but specifically has plans to cut ties with a sliver represented by North American retail finance. As reported by the Financial Times, shedding 20% of retail finance could raise approximately $4 billion based on an estimated $20 billion value for the entire operation. This amount would more than double the $1.8 billion raised by Twitter in November of last year.
What exactly would stockholders receive should they purchase shares in the IPO? A piece of a steady lending operation with $53 billion in receivables that generates about half of the consumer segments profits, or roughly $2.2 billion. Those profits have grown from 57% from $1.4 billion at the end of 2010.
To be sure, that growth has tapered off in the past few years, so don't expect this IPO to generate anywhere near the typical IPO hype. GE's retail finance business, in fact, might be the opposite of a high-flying social media or technology start-up operation.
Nevertheless, the IPO will generate some buzz in the financial media simply because of its size. In addition, by 2015, GE expects to part ways with the remaining 80% of the retail finance business, which could set the stage for a much larger initial public offering down the road.
More than a half-decade since the financial crisis, GE is nearing a tipping point where a sizable portion of its banking arm will exit the stage. GE's "banking fiasco," as I've referred to it, is squarely in the rearview mirror.
Hopefully, for shareholders like myself, this will bring a renewed focus to the management team as GE returns to its industrial roots.