Nelson Peltz made headlines yesterday by predicting a break-up at GE (GE) , one of his Trian Partners' core portfolio holdings.
Peltz's associate Ed Garden is on GE's Board, so he may have more insight into the workings of Edison's colossus than most, but his comment that "It's onward and upward, they have the makings of a plan" does not jibe at all with GE's stock price performance. Look at your stock chart service and you'll see that GE shares have fallen in the 5-day, 1-month and year-to-date periods, and are down more than 50% in the past 12 months. Peltz may be buying what GE John Flannery is selling, but since he took over as CEO on August 1st of last year, GE shares have been a one-way ticket to losses in a market that has been on the up-and-up-and-up.
So would a "major breakup" as Peltz forecast yesterday actually unlock value for GE shareholders? I have so little faith in this management team's ability to execute that I have not spent much time running those numbers. I will give Flannery and Co. credit for combining GE's locomotive business with Wabtec, but the market clearly wants more, much more. The backdrop to that "break-up" is also a company that -- as I mentioned in my last Real Money article on GE -- is paying out $1 billion common stock dividends per quarter despite producing negative operating cash flow.
So, if you are going to get full value for your GE shares you must hope that:
- a) they sell enough assets to cover the dividend payments (comprehending the $6 billion of pension contributions they will make this year) or
- b) that somehow GE's corporate structure is re-aligned so that shareholders who want to be exposed to GE's fast-growing and highly profitable Aerospace and Healthcare businesses don't have to be stuck with GE's shrinking and barely profitable Power and Renewables businesses, as well.
Former CEO Jeff Immelt's quasi-futuristic vision of the "industrial internet" has been proven to be so much consultant-ese gobbledygook. GE Power has virtually zero synergies with GE Aerospace and GE Healthcare and none of those businesses have any synergy with GE-controlled Baker Hughes (BHGE) .
But desperation is not the mother of value creation, and only Aerospace would fetch top dollar today in the case of a full dissolution of GE. Timing is everything when it comes to maximizing value of industrial assets, and this is not the time to sell any of the non-aerospace businesses.
For example, Baker Hughes GE sports a total market cap of $40.5 billion, so GE's 62.5% BHGE stake would be worth a little more than $25 billion at today's prices. Given GE's share count of 8.7 billion outstanding, that means GE's Baker Hughes stake is worth about $2.90 per share. Is it worth it to sell an oil services company when the U.S rig count is still 45% below its prior peak just to try and capture a quarter of the company's' value. No, unequivocally not.
I believe Power is an un-saleable asset in the current market environment for large scale generation projects, a market Flannery recently predicted would not improve until at least 2020. Renewables is in a similar situation, so really, only Aerospace and Healthcare are saleable now.
Diagnostics company Illumina is currently fetching an enterprise value of $42 billion versus management's guidance for current fiscal year revenues of $3.1 billion. If GE could get anything like that multiple for GE Healthcare, which will by my estimates produce annual revenues of about $18 billion this year, then you would be talking value creation. GE Healthcare ran to an operating margin of 15.6% in the first quarter, or about half of Illumina's profitability rate, though, so the two business are not fully comparable.
So, that's the existential issue Flannery must face, perhaps with prodding from Peltz and Garden. GE is being propped up and can only pay its dividend (note that I wrote "pay" not "afford to pay", because they can't) because of the profitability of Healthcare and Aerospace. A business combination that would remove those profitable segments would leave an old GE full of unfunded pension liabilities and GE Capital legacy issues.
It's not a good choice.
