If you were worried about where General Electric (NYSE: GE) was heading, you were not alone. Plenty of top analysts, commentators, and stock markets have been eager to look at the troubled industrial conglomerate, and new CEO Larry Culp to show the company's woes are behind it.
Well, on Monday that moment everyone was waiting for, which Culp announced a surprise plan to sell the company's BioPharma business to its former company Danaher (NYSE: DHR) . The stock shot up on news about the deal, but there were some other hidden gems in the company's press release that would make investors feel even more secure that GE could ̵
What is big deal
In June 2018, former CEO John Flannery announced that GE would spin GE Healthcare, the company's well-run health care system. This was a double-edged sword for investors, as GE Healthcare had some of the best margins for any entity in the company – only the standout GE Aviation was higher. Spinning it meant that these margins – not to mention the unit's assets – would be gone forever.
But GE planned to upload health care with debt and pension obligations before the spin, which would put GE in a stronger financial position, as these were off balance. Also, when GE has got rid of (or announced plans to get rid of) its appliances, consumer lighting and oil and gas aggregates, Healthcare was no longer suitable for what the rest of the company did: production of various types of turbines.
On Monday, these plans were elevated. GE will now sell its BioPharma device, which produces equipment and software needed for businesses to investigate, develop, and produce biopharmaceuticals – which, to be honest, are some very cool things. The unit earns about $ 3 billion in annual revenue (about 15% of GE Healthcare total), leaving much of GE Healthcare untouched by the deal.
Why is it a big deal
The buyer is Danaher, another industry conglomerate, who was healed by Culp from 2001-2014. Since its departure, Danaher has reinvented itself by spinning out or selling some of its industrial companies and acquiring biotech companies. For example, in 2016, Danaher spread about 20 of its businesses, including measuring instruments and automotive equipment such as Fortive while purchasing molecular diagnostics company Cepheid, Inc. In 2018, it announced that it would acquire Integrated DNA Technologies. So GE's BioPharma device should feel at home with its new parent.
For GE, there will be $ 21 billion in cash, which it will use to pay down its $ 110 billion net debt burden. Danaher will also acquire $ 400 million from GE's pension liabilities, further helping GE's balance sheet. And at a selling price of just over 7 times annual income, there is little question that the price is right. It eased some concerns that GE would take into account the fire outage price when it unloaded its assets.
And GE continues to keep the rest of its overcoming healthcare, which it can spin out as planned, sell off pieces or hang on. Despite some initial reporting that the spinoff was definitely out of the table, Culp has made it clear to CNBC that it will only be reconsidered, but "an IPO in 2019 looks unlikely at this point."
So the deal itself is great for both companies, but in the press release that announced it, GE also raised two other major concerns investors have had about GE: planning and transparency.
An even greater deal
So far, Culp has been reluctant to give any details about what he has in mind for GE's future, beyond large picture statements such as the need to "strengthen business, from [GE’s troubled unit] Kraft" and the need for the company to reduce debt.
In general, Culp has been less prominent than its predecessor, Flannery, who at this time in his appointment had already led some conferences without a conference and who, along with CFO Jamie Miller, had presented himself at several industrial conferences.
But in the press release that announced the deal, GE also announced that Culp would present in just over a week at the Morgan Aviation, Transportation & Industrials conference on March 5, his first appearance as CEO. J.P. Morgan analyst Steve Tusa has been one of the most vocal GE bears and is expected to lead the Q&A session with Culp, so this looks like a big step forward in the company's willingness to answer difficult questions.
In addition, GE has planned an introductory conference call for March 7 to address the company's insurance situation, which has caused so many headaches to the company over the past year. Then the company plans to issue the company's expectations for a March 14 conference call, and five days later, CFO Miller will make its first presentation at Culps tenure at the Merrill Lynch Global Industrial and EU Auto Conference.
After three months of near complete silence, this flood of information and interaction seems to indicate that the company has heard the criticisms and is determined to contact them.
Turning the corner
The most surrounding in the four months since Flannery's abrupt ouster and Culp's ascent to the C suite has been what seemed like the lack of a concrete plan beyond what Flannery had divided in June 2018. While this BioPharma deal is great, investors should pay more attention to all the information the company will share through mid-March and see if it meets with their approval. Keep in mind that it is still quite possible that this agreement will be announced ahead of an unfortunate 2019 perspective. So it may be too early to say that GE has definitely turned the corner.
Two weeks ago, after GE's fourth quarter earnings report, I wrote, "Maybe Culp will pull the rabbit out of the hat and surprise everyone with a strategic masterpiece." At that time, I considered the view unlikely, but even this GE bear must admit that Monday's revelations should go a long way towards improving GE investor confidence in the company and its management.