General Electric's dash for cash is stealing value from shareholders, JPMorgan says

  • General Electric on Friday announced the planned merger between Wabtec and GE Transportation has been revised.
  • The revised terms are negative for GE shareholders, according to Christopher Glynn, an analyst at Oppenheimer.
  • GE’s stock lost more than half of its value in 2018.
  • Under the leadership of new CEO Larry Culp, GE has sped up efforts to raise cash by selling assets in an effort to increase investor confidence.
  • Watch GE trade live.

General Electric‘s dash for cash is stealing value from the shareholders, JPMorgan says.

“The GE story is about a transfer of asset value away from the equity holder-more of a salvage situation than about equity value creation,” said JPMorgan analyst Stephen Tusa in a note out Monday.

Last Friday, General Electric said the planned merger between rail-transport company Wabtec and GE Transportation, a business unit of GE, has been revised. Under the new terms of the deal, GE will spin off a portion of GE Transportation to GE shareholders and immediately thereafter merge GE Transportation into a wholly owned subsidiary of Wabtec by the end of February 2019.

Upon closing, GE will receive approximately $US2.9 billion of cash and will directly own about 24.3% of Wabtec. Meanwhile, Wabtec shareholders will own 50.8% of Wabtec, compared to 49.9% under the previous terms.

“The revised terms of the WAB deal are mechanically and mathematically negative for the GE shareholder,” Tusa said. “The WAB transaction sheds light on several aspects of this view, and sends a stark message around bringing more cash to go to liabilities (pension, debt, insurance, GECS at large), and less ‘asset value’ for shareholders.”

It was not the first time the iconic American industrial company has sped up efforts to raise cash. In 2018, GE’s stock lost more than half its value as its power business struggled, price-cost pressures were compounded by the US-China trade war, and its LEAP engine suffered through behind-schedule deliveries.

Under the leadership of CEO Larry Culp, who was appointed on October 1, GE has been working hard to reduce debt by selling assets. In November, GE announced plans to expedite efforts to sell a $US4 billion stake in the oil-field-services provider Baker Hughes. Additionally, its finance arm, GE Capital, sold a $US1.5 billion healthcare-equipment finance portfolio to the US lender TIAA Bank.

And in December, General Electric said its digital unit would sell a majority stake in ServiceMax, a software provider, to the technology-focused private-equity firm Silver Lake. GE is also taking steps tospin off its health-care unit to narrow its focus on building jet engines and power equipment.

Entering the new year, Bloomberg reported that buyout firm Apollo Management was eyeing a bid for GE’s jet-leasing business GE Capital Aviation Services.

GE’s efforts to free up cash and increase liquidity were positively viewed by Tusa in December. At that time, he raised his rating to “neutral” from “underweight,” a view he had held since May 2016 when the stock was above $US30. But now, Tusa questions if the company’s actions to reduce liabilities has come at a material cost.

“In our view, GE stock was never priced for a liquidity situation, and while drawing down bank lines and making moves to bring cash suggest there is an eye toward liquidity, this remains more about what is left when the dust settles as the company drives towards a more sustainable capital structure, not just about survival and CDS spreads,” Tusa added.

General Electric was down 45% in the past year.

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