6/26/2018
General Electric Co. GE -2.30% said Tuesday that it plans to spin off its health-care business and unload its ownership in oil-services company Baker Hughes , BHGE -0.86% betting that the once-sprawling conglomerate can reverse a painful slump by further shrinking.
The news confirmed an earlier report by The Wall Street Journal.
The moves are the conclusion of a yearlong strategic review by CEO John Flannery that has been tumultuous for GE employees and investors. The onetime industrial bellwether has slashed its dividend and has already set plans to shed numerous businesses. Its shares have tumbled by half in the past year, erasing more than $100 billion in wealth.
The final plan focuses GE around its power, aviation and renewable-energy businesses. These units, which accounted for more than half of GE’s $122 billion in revenue last year, mostly sell turbines to power plants and engines to jet makers.
GE’s revamped board approved the new strategy, and there are no plans to sell additional divisions or break apart the aviation and power divisions, said people familiar with the discussions.
The company will likely reduce its dividend payout following the spinoff of its health business and need to pump more funds into its struggling finance arm next year, these people said.
The new plan envisions a much smaller company than GE was just a decade ago when it also filled American homes with appliances, owned NBCUniversal and ran one of the biggest U.S. lenders, financing everything from mortgages to insurance.
The plan is expected to be released on the same day that the Boston-based company is removed from the Dow Jones Industrial Average, a spot it has held since 1907. GE shares closed Monday at $12.75.
Mr. Flannery, a three-decade veteran who took over last August, has vowed to revamp GE’s corporate umbrella, which provided research, marketing and other functions to business units. Instead, the company aims to shrink the organization, with $500 million in additional costs cut by the end of 2020. Specifics of the plan, including possible layoffs, couldn’t be determined.
The fortunes of GE biggest units have diverged in recent years, raising questions about its conglomerate structure and leadership. The power business has struggled with slack demand and plunging profits, prompting thousands of job cuts. The aviation unit is riding strong orders for its new jet engines and generating nearly half of the company’s industrial profits.
GE has also been grappling with problems in what remains of GE Capital, including surprise loses at a legacy long-term care insurance business. Under the latest plan, the people said, GE will further reduce lending at GE Capital and the parent company will make a $3 billion contribution to the finance division in 2019.
Sales and profits have been rising at the health-care unit, which accounted for about 16% of companywide sales, or $19 billion, last year. The business produces magnetic resonance imaging machines and other equipment sold to hospitals as well as laboratory supplies for biotech firms.
GE plans to sell 20% of the division and later distribute the remainder to its existing shareholders. The newly separate company would also assume $18 billion in liabilities from its parent, they said. The division will continue to be run by CEO Kieran Murphy and the separation will likely take 12 to 18 months, they added.
GE expects to exit its investment in Baker Hughes over the next two to three years, the people said. GE merged its oil-and-gas business with Baker Hughes in 2016, leaving GE with a two-thirds stake in the enlarged public company. Those shares are now worth about $23 billion and executives have wavered on whether GE would hold on to the stake or pare it back.
The Baker Hughes deal was one of the last major moves by former CEO Jeff Immelt, who led GE for 16 years and left last summer amid pressure to boost profits and revive the stock price. In addition to investing in the oil patch, Mr. Immelt doubled down on the power business by scooping up assets from rival Alstom SA and sold off much of GE Capital after the financial crisis.
Mr. Flannery, who spent most of his years at GE Capital, ran GE Healthcare before being selected to succeed Mr. Immelt. Some investors and analysts have been critical of the pace of change at GE in the past year as the stock has sharply declined. Mr. Flannery vowed to examine all options for the businesses but worked at his own pace and communicated in broad strokes.
GE’s board is expected to name Larry Culp, former CEO of Danaher Corp., as lead independent director. The shift comes just two months after Mr. Culp joined the board in an overhaul that removed several of its longest-serving directors and added three outsiders.
The company’s decision to spin off health care and separate Baker Hughes comes a month after Mr. Flannery agreed to exit the railroad business by merging GE’s locomotive business with Wabtec Corp. in an $11 billion deal.
Earlier this week, GE agreed to sell its gas-engine business to a private-equity firm for about $3 billion. For more than a year, it has also been looking to sell its century-old lighting business.
If GE completes all the proposed transactions, it would leave behind a simpler company with four divisions, including a much diminished finance arm. Last year, GE had eight divisions.
“I have no nostalgia for the way things have been,” Mr. Flannery told investors last month at an industry conference. “If there’s a better way to do things, we’ll do them.”
Write to Thomas Gryta at thomas.gryta@wsj.com
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