GE: We Hardly Knew Ya

[don]

Back in April 2013, Apple shocked the world when in a dramatic U-turn to Steve Jobs beliefs, it announced what was "the largest single share repurchase authorization in history" when it boosted its share repurchase authorization to $60 billion from $10 billion. Today, GE did its best to match this number, when it reported that as part of a massive business restructuring, it announced a "new Board authorization of up to $50B buyback."

The main reason for this near record buyback announcement is two-fold: GE's belief that there is no incremental value left in GE Capital, the bulk of whose assets it is selling, a division which nearly bankrupted the conglomerate back in 2008 when as a result of its massive leverage, anywhere between 9x and 10x...


... the division that was more profitable than the Industrial section precisely due to this massive leverage...


...forced GE to participate in any number of the freshly created bailout programs and which led to GE being branded a Systemically Important Financial Institution, or SIFI, a stigma which management was less than happy with. As a result of the GECC sale, Jeff Immelt was delighted to report that it "will eliminate the only Industrial, wholesale-funded, non-bank SIFI." The proud buyers of the bulk of GE Capital's assets: Blackstone and Wells Fargo, who are part of a $22.5 billion sale agreement.

So just how will GE fund the massive buyback and generate "up to $90 billion in potential return to shareholders"? Here is the breakdown from the just released presentation:

• $26.5B of Real Estate transactions announced
• Plan to sell ~$200B of ENI ex. liquidity (~$260B of assets) … day 1 charge of ~$16B, including $2.4B disc. ops. charge for Real Estate

Why is the company doing this transaction now? Here are its thoughts:

• Business model for large, wholesale-funded Finco has changed dramatically; more difficult to generate acceptable returns
• Synchrony and other dispositions are proof points that GE Capital platforms are more valuable elsewhere
• Strong seller’s market for financial assets, with good GE track record of execution and value realization
• More clarity on SIFI de-designation process
• Efficient approach for exiting non-vertical assets that works for GE and GE Capital debtholders and GE shareholders, including guaranteeing GE Capital debt-a)

Visually, this is what GE is selling and what it is keeping.



A drilldown into the assets to be sold:



And while GE winddowns the bulk of GE Capital, this is what it will do with the proceeds:



The funniest part of the presentation: the financial bridge, which shows that all the losses due to the company's decline (25 cents in the next 3 years), will be matched by the gains from the collapse in the amount of outstanding GE stock (25 cent buyback impact boost).



And what goes without saying is that the main driver for the mega transaction is that without the SIFI overhang of "Capital", Industrial now becomes a very atttractive acquisition target for an acquisitive international acquirer. Because in the New Normal Siemens issuing €200 billion in negative interest debt to acquire GE sounds like just the kind of centrally-planned insanity that the central banks have unleashed on the world.

Plus it's clear that Immelt is tired of managing this behemoth and wants to rest.

[GRG55]

Re: GE: We Hardly Knew Ya

Another data point that the FIRE era is over, and the finance sector is ever so slowly shrinking to something closer to finance's traditional share of the economy.

[don]

Re: GE: We Hardly Knew Ya

Another data point that the FIRE era is over, and the finance sector is ever so slowly shrinking to something closer to finance's traditional share of the economy.

(Did GE sell off its appliance division to Electrolux?)



Back in the early 2000s, General Electric — previously known as the world’s biggest, best managed maker of cool, useful things like jet engines and wind turbines — discovered that it could make even more money by exploiting its AAA credit rating to borrow cheap currency and lend it out at higher rates. It ramped up its vendor financing, enabling customers to buy more of its stuff, and built a real estate empire that spanned the globe.

It took a while for people to figure out the the company, via its GE Capital division, had in effect become one of the world’s biggest, most highly-leveraged banks. But eventually they got it, and when the real estate/derivatives bubble burst in 2008, being a major bank was like being a dot-com in 2000 or a silver miner today: a very bad thing in the eyes of shell-shocked investors. GE’s market value reflected its new corporate persona:



Now it appears that GE’s managers (unlike most of the people running today’s governments and big banks) actually remember all the way back to the previous decade, and have decided that they don’t want to live through a replay. This morning the company announced that it is selling a big part of GE Capital’s real estate assets and using the proceeds to buy back stock.

Some thoughts

Wise move, now that virtually every measure of financial leverage is once again flashing red. Rich-world government debt has doubled in the past five years, student loans and subprime auto loans have replaced subprime mortgages at the junk paper buffet, and big-bank derivatives books are, amazingly, even bigger than when they nearly destroyed the global financial system. The next few years, in short, are going to be another terrible time to be a big bank, and GE’s exit from that part of its business will look a lot like Sam Zell’s exit from his real estate empire in 2007: really well-timed.

This won’t make GE immune to a global slowdown, of course, and that’s probably coming, given the oil debt and hedges on which banks now have to make good, the soon to be soaring default rates on subprime auto loans in the US and dollar carry trade plays in the developing world. So the share buybacks will probably be seen, in retrospect, as one of those peak-of-the-cycle cautionary tales for future CEOs.

But GE will at least be spared the indignity of another government bailout and share-price near-death experience.

Rubino

[GRG55]

Re: GE: We Hardly Knew Ya

(Did GE sell off its appliance division to Electrolux?)



Back in the early 2000s, General Electric — previously known as the world’s biggest, best managed maker of cool, useful things like jet engines and wind turbines — discovered that it could make even more money by exploiting its AAA credit rating to borrow cheap currency and lend it out at higher rates. It ramped up its vendor financing, enabling customers to buy more of its stuff, and built a real estate empire that spanned the globe.

It took a while for people to figure out the the company, via its GE Capital division, had in effect become one of the world’s biggest, most highly-leveraged banks. But eventually they got it, and when the real estate/derivatives bubble burst in 2008, being a major bank was like being a dot-com in 2000 or a silver miner today: a very bad thing in the eyes of shell-shocked investors. GE’s market value reflected its new corporate persona:



Now it appears that GE’s managers (unlike most of the people running today’s governments and big banks) actually remember all the way back to the previous decade, and have decided that they don’t want to live through a replay. This morning the company announced that it is selling a big part of GE Capital’s real estate assets and using the proceeds to buy back stock.

Some thoughts

Wise move, now that virtually every measure of financial leverage is once again flashing red. Rich-world government debt has doubled in the past five years, student loans and subprime auto loans have replaced subprime mortgages at the junk paper buffet, and big-bank derivatives books are, amazingly, even bigger than when they nearly destroyed the global financial system. The next few years, in short, are going to be another terrible time to be a big bank, and GE’s exit from that part of its business will look a lot like Sam Zell’s exit from his real estate empire in 2007: really well-timed.

This won’t make GE immune to a global slowdown, of course, and that’s probably coming, given the oil debt and hedges on which banks now have to make good, the soon to be soaring default rates on subprime auto loans in the US and dollar carry trade plays in the developing world. So the share buybacks will probably be seen, in retrospect, as one of those peak-of-the-cycle cautionary tales for future CEOs.

But GE will at least be spared the indignity of another government bailout and share-price near-death experience.

Rubino

The "financialization" of GE fell into a familiar pattern for many of the largest, mostly USA headquartered (but not all!), firms during the FIRE era. "Neutron" Jack Welch, who presided over GE from 1979 to 2001, brought about some huge changes in the company that were necessary (otherwise it may well have followed Kodak et al into obscurity). However, like many others at the time, part way through his term Welch and GE were seduced by the discovery that the growing FIRE economy financial sector provided superior returns on shareholder capital compared to anything that could be achieved by bashing metal into dishwashers, or similar.

Further, the unique reporting rules that apply to financial institutions only afforded the opportunity to "manage earnings", and as GE Capital grew to become a dominant part of the company Welch become famous for beating GE's per share earnings estimates by exactly one penny, quarter after quarter after quarter. This remarkable feat would have been completely impossible in a purely manufacturing concern, but it sent Wall Street analysts into raptures. As we all know, for the past 3 decades, what's good for Wall Street is good for GM (and GE, and executive stock options, and Bubblevision viewer numbers, and...).

I don't know who was first to pick up on this but Seattle hedge fund manager Bill Fleckenstein deserves credit for writing about the blatant manipulation of earnings at GE under Jack Welch years before it finally blew up in the financial crisis.

[lektrode]

Re: GE: We Hardly Knew Ya

does this mean my qtrly dividend checks will start showing numbers to the left of the decimal point ?
(what with my huge holding an all: one share, a gift from my other1/2 for my 50th - in 2008 no less - to encourage me to buy more ;)

still have to giggle when i remember back to the daze after the markets were closed in the aftermath of that fateful 11sep, when eye noted that one could've bought good ole generous electric - for not the 40bux or so it had been til then, but for ONLY 24 BUX/SHARE?

course when the bottom finally did come - in 2009, at about 6 - too bad i was 'all in' on fixing up my dump (most would call it a house) and was leveraged-up to homedepot for 20grand...

[lektrode]

Re: GE: We Hardly Knew Ya

O&BTW:

(Did GE sell off its appliance division to Electrolux?)

yeah, last year

and hopefully elux will do a much better job with em than whirldpoof is with their rollup of the rest of the homedepot fillers...

funny tho - this story has been floating around awhile?

esp after all the great fanfare of 'US insourcing' and discussed round here (behind the paywall, but no can find) at length - that we saw just a couple years ago - at the time:
'Immelt hasn’t just changed course; he’s pirouetted....' again ??

"..Just four years after he tried to sell Appliance Park, believing it to be a relic of an era GE had transcended, he’s spending some $800 million to bring the place back to life. “I don’t do that because I run a charity,” he said at a public event in September. “I do that because I think we can do it here and make more money.”

yeah - by selling it to the swedes...

But GE will at least be spared the indignity of another government bailout and share-price near-death experience.
Rubino

yep - esp since they wont have access to the same TBTF deal opportunities - as in 2008-09 - goin for em on the next go-round
(read: mo better to be 'all in' on defense/.mil/infrastructure stuff, you know... like better positioning for 'bi-partisan opportunities' ..)

[lektrode]

Re: GE: We Hardly Knew Ya

O&BTW2:
Photos: GE’s Historic Technologies

From the light bulb to jet engines, a look at over 100 years of GE products and milestones

(from back in the good ole days - as in: before team LBO + TBTF,inc took over - you remember them daze, right mr don?
like when USA,inc actually manufactured stuff - not the least of which was the first 'middle class' in whirled history...)

[lektrode]

stockman: The Deplorable Truth About GE Capital

dont i wish i knew how to type (with all 10 fingahs..)

seen just now over at 0C:

Submitted by David Stockman via Contra Corner blog,
(and at the rate he kranks em out, DS must have 12 and can use em ALL)

this is reeeeealy looooong, but here's the opening salvo...

GE’s announcement that its getting out of the finance business should be a reminder of how crony capitalism is corrupting and debilitating the American economy. The ostensible reason the company is unceremoniously dumping its 25-year long build-up of the GE Capital mega-bank is that it doesn’t want to be regulated by Washington as a systematically important financial institution under Dodd-Frank. Oh, and that its core industrial businesses have better prospects. We will see soon enough about its oilfield equipment and wind turbine business, or indeed all of its capital goods oriented businesses in a radically deflationary world drowning in excess capacity.

But at least you can say good riddance to GE Capital because it was based on a phony business model that was actually a menace to free market capitalism. Its deplorable raid on the public purse during the Lehman crisis had already demonstrated that in spades.

the rest of it here

[don]

Re: stockman: The Deplorable Truth About GE Capital

“It’s incredible what these guys have done,” said Glenn Schorr, an analyst with the investment firm Evercore. “They remind me of Goldman Sachs in the 1990s — every time you see a new business that is growing, that is where they are.”

Blackstone’s Deal With G.E. Highlights Its Real Estate Holdings

By LANDON THOMAS Jr.APRIL 12, 2015


As Blackstone’s top executives fan out across the globe, pitching their services at elite gatherings of investors, they invariably tell the crowd: Hope you guys like this hotel, because we own it.

When it comes to real estate, Blackstone owns a lot more as well. The private equity firm, while better known for its huge buyouts in the deal boom before the financial crisis, is the largest private sector landlord in the United States. And that was the case even before General Electric announced on Friday that it would sell a $14 billion chunk of its real estate assets to Blackstone’s fast-growing property division as part of the conglomerate’s retreat from finance.


Blackstone’s bold bet on real estate is worldwide: skyscrapers in New York and Chicago, sprawling malls and luxury hotels in Europe, Asia and the Middle East and, recently, close to 50,000 rental homes across the United States.

The transaction signifies how the real power on Wall Street has shifted since the financial crisis from risk-averse investment banks to asset managers, which have been inundated with cash from investors desperate for higher returns amid super-low interest rates.


The G.E. deal also crystallizes what many market analysts have come to accept as fact: Blackstone may have started out doing mergers and acquisitions in the 1980s and moved on to record-setting private equitydeals in later decades, but these days the really big money is being made in real estate.

For Blackstone at least, the richest of these returns have been found in real estate.

Of the $272 billion that Blackstone now oversees, $81 billion is related to real estate, followed by private equity, high-yielding debt and hedge funds. Over the last two years, 50 percent of the firm’s $7.8 billion in core profits have come from what it has made from buying properties, sprucing them up and reselling them.

“This deal points to a further diversification of the firm’s business model,” said Bulent Ozcan, who follows Blackstone as an analyst at RBC Capital Markets.

That is actually an understatement considering the fact that about 200 real estate professionals at Blackstone (out of a companywide 2,300 people) have delivered $4 billion in cash to the firm in just two years.

So it was no surprise when the chief executive of G.E.’s finance unit said last week that when the company was contemplating how it might unload its globe-spanning bundle of office buildings, shopping centers and homes in one fell swoop, only one person came to mind: Blackstone’s real estate chief, Jonathan D. Gray.

The 45-year-old Mr. Gray is everything that his larger-than-life boss, Stephen A. Schwarzman, who co-founded Blackstone in 1985, is not: Mild mannered and under the radar, he is inclined to deflect praise as opposed to absorbing it.

He also trails Mr. Schwarzman in terms of the stratospheric sums that Blackstone awards its senior-most executives, though the gap is narrowing.
Last year, Mr. Gray took home about $126 million in cash, compared with $690 million for the Blackstone chairman. At the firm, he is now the second-largest shareholder with a 4 percent stake. (Mr. Schwarzman owns 22 percent of the $46 billion company.)


In its size and scope, the G.E. sale mirrors an earlier, if not bolder, move by Mr. Gray in 2007, when Blackstone purchased $39 billion in prime office buildings from the real estate mogul Sam Zell and then flipped a bunch of the properties just before the markets turned sour.

The transaction anointed Mr. Gray as a top Wall Street mover and shaker, and as his business flourished in the subsequent years, the stage was gradually set for last week’s G.E. deal.

Given the amount of money and the complexities involved, the deal came together quickly.

In mid-March, senior G.E. executives contacted Mr. Gray and told him that they were going to put up for sale $23 billion in real estate assets (including portfolios of loans as well as actual properties) in Australia, Mexico, Europe and the United States.

Generally, a deal of this size would require a club of banks teaming up or would be done in a piecemeal manner.

But because G.E. wanted to move fast, the company offered Mr. Gray and Blackstone an exclusive opportunity to examine their holdings.

“We told him, ‘If you can hit this bid on an exclusive basis, it’s yours,’ ” Keith S. Sherin, the head of GE Capital, recalled in an interview with The New York Times last week.

As luck would have it, Blackstone had just raised $14.5 billion (in about four months) for a new real estate fund. Having worked with G.E. in the past and being more or less familiar with the assets (at home and abroad) being offered, it was in a position to move quickly.

and not one itsy bitsy teeny weeny word on derivatives fodder . . . odd

[mmr]

Re: GE: We Hardly Knew Ya

FIRE isn't shrinking yet, it's just changing in form.

US private sector debt has been growing faster than GDP for the last few years, but more of the growth has been outside of the large banks (e.g., corporate debt directly issued to bond funds - of course, the TBTF earn fees selling the bonds).

The Fed has gradually forced the larger banks (for which they would bear the blame in the event of failure) to hold more equity, which has slowed their rate of growth. This has just caused more of the debt to move out of the banking system into the less-regulated "shadow banking" space (e.g., hedge funds) that aren't subject to the same regulatory scrutiny and leverage limits. Of course, since no one is responsible for oversight of that part of the FIRE sector, no blame can be assigned if it blows up in the next downturn.

[Milton Kuo]

Re: GE: We Hardly Knew Ya

FIRE isn't shrinking yet, it's just changing in form.

US private sector debt has been growing faster than GDP for the last few years, but more of the growth has been outside of the large banks (e.g., corporate debt directly issued to bond funds - of course, the TBTF earn fees selling the bonds).

The Fed has gradually forced the larger banks (for which they would bear the blame in the event of failure) to hold more equity, which has slowed their rate of growth. This has just caused more of the debt to move out of the banking system into the less-regulated "shadow banking" space (e.g., hedge funds) that aren't subject to the same regulatory scrutiny and leverage limits. Of course, since no one is responsible for oversight of that part of the FIRE sector, no blame can be assigned if it blows up in the next downturn.

This certainly seems to be the case. GE's real estate portfolio is being bought by Blackstone. Since hitting its bottom in March 2009, Blackstone stock has yielded a 50% CAGR if dividends are included.

[don]

Re: GE: We Hardly Knew Ya

GE and the Corporate Credit Market

WSJ notes, GE Capital paper accounts for 2% of all outstanding IG debt and the absence of issuance may well serve to further inflate the corporate bond market bubble as reduced supply meets still-elevated demand.

[GE] said it doesn’t expect its GE Capital unit to sell new long-term debt for at least five years, effectively eliminating one of the biggest corporate issuers at a time when firms around the globe are tapping the market at a record clip…

GE also said it would guarantee repayment of roughly $210 billion of debt from GE Capital. Previously, the parent company provided other support but not an unconditional guarantee…

The retreat of GE Capital could lower the supply of new corporate bonds, adding modestly to the trends that in recent years have fueled a sharp rise in bond prices and a corresponding decline in bond yields, analysts said…

GE Capital is widely considered a core issuer by bond portfolio managers and a stalwart among companies bearing investment-grade ratings. The company used proceeds from its debt sales to finance its operations, including lending.

The firm sold the most investment-grade bonds in the U.S. of any corporate subsidiary from 2002 to 2007, as well as in 2009, 2011 and 2012, according to Dealogic. By market value of outstanding debt, it is the fourth-largest issuer represented in the Barclays U.S. Corporate Investment Grade index.

In 2009, GE Capital sold $52.3 billion in bonds, accounting for 5.1% of highly rated U.S. corporate-debt issuance. The firm has issued less each year since then, but GE Capital bond sales still make up 1.2% of new bonds sold this year, according to Dealogic figures.


Mizuho (via Bloomberg):

GE will keep some in-house financing but its need for wholesale finance will probably shrink by two thirds as it downsizes

Doubt that the new owners of former GE units/assets will use unsecured bond debt to fund their operations

Investors are already short of high quality paper and GE’s plans look likely to intensify the squeeze.

from CreditSights:

Market liquidity will significantly shrink as GECC’s previously massive debt footprint comes down substantially over next 24 mos.

Total funding of $350b is expected to fall by nearly half by year-end 2016.

This reduction, specifically L/T tradeable debt, will be driven by a front-loaded maturity schedule ($50b+ maturing by year-end 2016) and a stated intention to redeem currently callable securities (CreditSights’ est. ~$14b).

The above, coupled with absence of new supply through at least 2019, should extract a material amount of liquidity from the market.

Meanwhile, you can also count GE Capital out of the commercial paper market which isn't exactly great news for money market funds which are already laboring under ZIRP and NIRP:

GE Capital, once a prolific issuer of the debt known as commercial paper, also plans to significantly reduce its footprint in that market, where firms issue short-term IOUs to finance their activities and near-term expenses. The company announced it would reduce its outstanding commercial-paper debt to about $5 billion by year end, down from about $25 billion during the fourth quarter of last year and from $72 billion at the end of 2008.

The commercial-paper market shrank in the aftermath of the financial crisis, as investors became skittish about lending to all but the most stable companies on such a short-term basis.

GE Capital’s withdrawal from the market is “certainly not good news for supply-starved money-market investors,” said Peter Crane, president of Crane Data, which tracks money-market funds.