Taking a Closer Look at General Electric's Synchrony Spin-Off

General Electric has some pretty complicated transactions recently. Here's a look at details surrounding its Synchrony Financial IPO coming soon.

Daniel Miller
Daniel Miller
Jul 21, 2014 at 6:05PM

It's shaping up to be one heck of a busy year for America's largest industrial company, General Electric (NYSE:GE). Not only did the conglomerate recently make one of its largest acquisitions in company history -- the largest when unadjusted for inflation -- when it acquired assets from Alstom, but it's about to take the first step in spinning off a sizable chunk of its retail finance business, Synchrony Financial. It would be difficult to summarize these complicated moves in a few words, to be sure.

"We are boldly reshaping the company," GE CEO Jeffrey Immelt said during a conference call.

Touche, Mr. Immelt. Apparently, it's more difficult to understand these strategic moves on paper than it is to summarize them, so let's take a closer look at the details surrounding its Synchrony Financial spin-off.

What is Synchrony Financial, exactly?
Most investors are up to speed with the majority of General Electric's industrial businesses, but what's under GE Capital's umbrella is a bit more mysterious. That's because the company's financial division has its hand in many different cookie jars, some more risky than others.

Part of GE Capital provides cash flow and loans to mid-size and large U.S. businesses trying to expand as well as sometimes funding GE's own growth, acquisitions, or balance sheet optimization. Now, it's important to know that this part of GE Capital won't be included in the Initial Public Offering (IPO), which will become Synchrony Financial, later this month.

The part involved in the IPO is a lending arm within GE Capital that focuses on credit card receivables. Synchrony's business generates its revenue through three platforms: Retail Card, Payment Solutions, and CareCredit. The majority of the revenue comes from the first platform, Retail Card, where it partners up with large retailers that often bug shoppers to sign up for their private label credit card while checking out at the register.

To give you an idea of what these partnerships generate, consider that between 24 partnerships, the credit cards generated $75 billion in purchase volume last year alone. Synchrony collected over $8.3 billion on interest and fees on those loans, before deducting for retailer share arrangements with its partners. It's profitable, to be sure, but it doesn't fit with GE's new focus on industrial business. For that reason, GE will spin the business off in the previously mentioned IPO.

By the numbers, GE is looking to spin off roughly 15% of Synchrony Financial for about 125 million shares, valued at roughly $24.50 as a midpoint of the estimated price range. GE hopes to raise a little more than $3 billion during the first part of its spin-off, and it values the entire company at roughly $20 billion.

Now, with a better understanding of what Synchrony is and how it generates revenue, and what it's worth as an IPO, here's what the spin-off means for General Electric investors.

Less of the nasty
The finance industry can be a risky and volatile business, as General Electric found out in 2008 when the financial collapse nearly brought GE to its knees. GE spinning off Synchrony will leave less risky finance operations, and it will make the company more stable as it refocuses on its industrial business roots.

In fact, roughly a year ago, GE Capital Corporation became one of the first two nonbanks to be designated as "systemically important" by the Financial Stability Oversight Council (FSOC). It was a move to address threats to the U.S. financial stability, and it raised a few eyebrows of some risk-adverse GE investors. As GE reduces the risk and volatility of its finance arm, many investors will breathe a sigh of relief.

Also, as GE continues to push its industrial business segment to generate 75% of earnings as soon as 2016 -- a reversal of GE Capital being responsible for more than half of profits before the recession -- it should boost the price-to-earnings ratio GE will trade at because industrial assets are generally viewed by investors as more valuable than financial assets.

One common question surrounding the IPO of Synchrony is simply: Why the spin-off? Why not sell the company for a faster cash transaction? The reason comes down to tax purposes. With a large, albeit faster, cash transaction process, there would be a hefty tax bill for GE and its investors. After GE spins off the first roughly 15% of Synchrony, the second part, when the rest will be spun off, will save a considerable amount on taxes because investors will be offered a tax-free swap of GE shares for Synchrony shares.

Bottom line
Another thing for investors to consider is the timing of this IPO. The IPO market has been hot, and GE seems to be striking its IPO at the right time to maximize its value. The spin-off also comes at a time when many analysts are predicting economic growth to continue and consumer spending to pick up, which would benefit Synchrony.

Ultimately, GE is returning to its core industrial roots and will continue focusing on its high-margin businesses in that segment, while de-risking its GE Capital business. As GE spins off Synchrony Financial at a good time to maximize its value, continues to acquire companies and grow organically, it should emerge from its bold reshaping as a much more shareholder-friendly company for potential investors.