Shares of Turnaround Letter Buy-recommended General Electric (NYSE: GE) jumped as much as 10% in early trading as it announced the sale of its BioPharma unit for $21 billion in cash, the closing of the spin-off/sale of its Transportation business to Wabtec for $2.9 billion cash plus a 24.9% equity stake. Most of the proceeds will be used to reduce GE’s debt burden. GE also announced the addition of highly respected Catherine Lesjak to its board of directors. All three of these indicate that new CEO Lawrence Culp is making major, rapid and sustainable improvements to GE’s outlook, reflected by the 45% year-to-date gain in GE’s share price.
BioPharma raises $21 billion in cash, GE Transportation up to another $6.5 billion
The sale brings in $21 billion in much-needed cash, likely removing at least for now the threat of a credit rating downgrade to below investment grade. We believe that Lawrence Culp’s credibility from his highly successful term at Danaher’s helm was vital to this transaction. While the deal was
somewhat favorable to Danaher, given its 8% share price jump in early trading today, for GE it was a sizeable “win”, allowing the sale at a reasonable-enough price of a non-core business that didn’t generate much cash flow yet helps solve a critical debt problem.
The sale of GE Transportation to Wabtec closed today. GE receives $2.9 billion in cash and a 24.9% stake in common equity and non-voting convertible preferred stock. We believe that GE will sell this stake, estimated by GE to be worth at least $3.4 billion, over the next three years. Wabtec itself will become a more valuable company with its new GE assets, offering the potential for higher proceeds to GE.
* GE shareholders will receive 0.54 Wabtec (NYSE: WAB) shares for every 100 GE shares they own.
Wabtec is an S&P 500 company with 2018 combined revenues of over $8 billion. It is one of the world’s largest locomotive makers and servicers, also producing an array of related industrial and automotive parts. The Wabtec name comes from Westinghouse Air Brake Technologies.
Addition of Catherine Lesjak to board
Last week, GE added Catherine Lesjak to its board of directors. Lesjak recently retired as long-time CFO (2007-2018) of Hewlett-Packard. She was regarded as a highly credible and capable CFO during a period of considerable change at the company. While remote, there is a possibility that she could replace GE’s current CFO. We believe new CEO Lawrence Culp was pivotal in convincing her to join GE’s board.
All of these changes indicate that GE’s new CEO is making major and rapid changes to GE.
We continue to rate shares of General Electric (NYSE: GE) a BUY with a 20 price target.
Disclosure Note: An employee of the Publisher owns GE shares