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General Electric: Culp cuts a shambling titan down to size

The truth will set you free. Especially when that truth is humiliation. The once-mighty acquirer General Electric has announced its formal break-up. The separation into three listed companies — focused on aviation, healthcare technology and power including renewables — is hardly radical. A business that was once the US’s apex industrial conglomerate has been cut down to size by years of scandal and stumbles.

The split will represent a final unbundling by chief executive Larry Culp, a company outsider free of alliances or devotion to “the GE legacy”. His laser focus has been on driving down debt.

Three years ago GE had $140bn in gross borrowings across its industrial and financial services unit, GE Capital. That figure is expected to fall below $65bn by the end of this year. GE recently sold its jet leasing business to bring in $24bn. In 2019, it flogged a life sciences business to Danaher for more than $20bn.

The group slashed its dividend to near zero a few years ago to preserve cash. Some analysts worried that, by selling good businesses, GE was permanently crippling its growth prospects. But investors were sharply discounting assets held by the group on the grim assumption, born of experience, that they would only be mismanaged.

The worst taint emanated from the financial services business. A shock insurance loss in 2018 required the group to plug the hole with $15bn of cash. The mess highlighted the “black box” opacity of a business where convoluted intra-group accounting made the value of the whole impossible to call accurately.

Since the depths of the market crash in March 2020, GE shares have more than doubled, slightly outperforming the S&P 500. But a market capitalisation of $120bn remains well below where it lay five years ago. “SpinCos” in healthcare and energy should thrive better without the stigma of GE’s problems.

The break-up should let sunshine finally peek through. In the company’s darkest days in 2019 and 2020, investors worried that liabilities exceeded the company’s assets and earnings power.

Now shares in GE could even start to appear fully valued. The company is set to earn just $5bn in industrial free cash flow in 2021. The book equity value of the group is $40bn and its market worth is three times that figure. Breaking up an empire, it appears, ultimately creates more value than building one.

The Lex team is interested in hearing more from readers. Please tell us what you think of the GE break-up in the comments section below

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