General Electric (GE) just got one step closer to scrapping its burdensome "too big to fail" Federal Reserve designation.
With Monday's announcement that the Fed has cleared GE's $17 billion asset sale to Goldman Sachs (GS) -- in the form of online deposits from GE Capital Bank -- the global manufacturer is nearing its target to become a much purer industrial player.
The transition began in earnest last April, when GE's CEO, Jeff Immelt, delighted shareholders with the announcement he will wind down most of GE Capital -- the lending arm largely responsible for embroiling the manufacturer in the 2008 financial crisis, and for GE's disproportionately stagnant recovery. Immelt inked roughly $157 billion in related asset divestures in 2015 alone.
"With the Federal Reserve approval now secured, the transaction is expected to close shortly after it receives state regulatory approval from New York and Utah," William Blair analyst Nick Heymann said in a Tuesday report. "This sale represents one of the last remaining pieces of GECC's North American assets, with only one additional major divestiture remaining to be finalized or closed."
The most obvious benefit in the transition away from financial services (Immelt aims to decrease GE Capital's share of total income to below 10% by 2018, down from more than 40% a year ago) is that the corporation's earnings will no longer be tethered to historically unpredictable GE Capital results.
The other major benefit, as Real Money reported, is that Immelt will soon be able to peel off GE's label as a Systemically Important Financial Institution label, or SIFI, a regulatory label determined by the Federal Reserve that essentially deems the company as "too big to fail."
"I think that the company will have an excellent 2016 because so many of its businesses -- health care, aerospace, water -- are in a secular upturn, which should ensure that the numbers are beaten," Real Money's Jim Cramer said in an email. "Plus, once SIFI is shed, the dividend could go much higher, not just the buybacks, which will be bountiful."
GE's asset sale to Goldman was first announced in August, but the Fed approval means GE has closed roughly $140 billion of its signed asset divestures, putting the manufacturer on track to close about $200 billion in total divestitures by the end of the year, according to Heymann. (William Blair maintains an Outperform rating on GE and a $38 price target.)
"Once the Goldman acquisition of GE Capital Bank is completed, the only other significant remaining U.S. business for GE Capital to divest will be the sale of U.S. Franchise Finance," Heymann said, pegging the value of assets under the unit at about $5.5 billion. "Once this last business is sold, virtually all of GE Capital's U.S. assets will have been divested and this should enable GE Capital's SIFI designation to be lifted."
As a result of such a rapid offloading in lending assets, Immelt has also been freed to ink megadeals such as the $10 billion purchase of French turbine maker Alstom's (ALSMY) grid businesses last fall, marking GE's largest acquisition to date.
And by beefing up its portfolios across sectors -- from sub-sea drilling deals in Norway to railway overhaul projects in India -- GE is well poised to absorb macroeconomic risks and fend off global rivals such as United Technologies (UTX) and Honeywell (HON), Heymann said.
"We believe GE is exceptionally well-positioned to fly above the turbulence of the moderately expanding but highly dynamic global economy," he said. "GE remains our No. 1 pick for 2016 among our two dozen diversified industrial company universe."