April 27, 2020 / 3:00 PM / a month ago

BREAKINGVIEWS-GE boss’s options are to shine or shrivel

(The author is a Reuters Breakingviews columnist. The opinions expressed are his own.)

By John Foley

NEW YORK, April 27 (Reuters Breakingviews) - General Electric boss Larry Culp has a choice: shine or shrivel. The U.S. conglomerate he runs has a mountain of debt to pay down, yet its main businesses are being pummeled by the Covid-19 pandemic. Culp could just hunker down and wait for the storm to pass, or take matters into his own hands.

He has raised $20 billion by selling the company’s biopharmaceutical division, shed staff, slashed the company’s dividend and sold shares in oil-services company Baker Hughes . The net debt attached to GE’s industrial businesses – as opposed to its financing arm, GE Capital – has already shrunk from its $47.9 billion at the end of last year.

But thanks to the coronavirus, GE’s goal of getting net debt down to 2.5 times EBITDA by the end of this year is now toast. GE had expected to pay around $5 billion towards reducing its pension deficit this year, for starters, but falling interest rates and lower investment returns could push the gap wider.

Meanwhile Culp can’t rely on help from the business itself. Most of GE’s cash flows come from making and servicing engines for aviation companies like Boeing which have been hit hard, too. GE’s power-generation and healthcare customers will be trying to conserve cash too. While GE made $4 billion of industrial cash flow last year, this year’s number may well be negative.

Around 70% of GE’s $11 billion EBITDA came from aviation last year. If that halves, the company’s total profit will come down by one-third. Assuming net debt falls by $15 billion, with the proceeds from BioPharma partially offset by industrial cash outflows and pension headwinds, GE could end the year with net debt of 4.5 times its EBITDA – worse than in December.

Culp could just wait it out. GE has bank lines and low expectations to fall back on. But after years of poor share-price performance, it might be wiser to be proactive. The healthcare business – which makes everything from ventilators to diagnostic equipment – ought to appeal to a private equity buyer, even if an initial public offering looks unlikely. UBS reckons it’s worth over $40 billion.

Find a buyer for a one-quarter stake in healthcare as well as the $5 billion Baker Hughes stake already earmarked for a sale, and GE’s net debt would come down to within a whisker of that 2.5 times EBITDA target. Shareholders might then view the GE boss as a man of action rather than a victim of circumstance.

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- General Electric is set to report first-quarter financial results on April 29. Analysts are forecasting $751 million of earnings, according to Refinitiv, roughly the same as the same period last year and half the figure from the final quarter of 2019.

- For the first quarter, GE expects cash flows from its industrial businesses, which include aviation, healthcare, power and renewables, to be negative $2 billion. It had previously said it expected to make between $2 billion and $4 billion in the full year.

- The U.S. conglomerate withdrew its guidance for the full year on April 9 because of the Covid-19 pandemic. It said on April 13 that it had more than $47 billion of cash on hand, including $20 billion from selling to Danaher a division that services biopharmaceuticals companies.

- GE had $59 billion of debt at the end of 2019, including its large pension deficit. Its goal had been to reduce net debt to 2.5 times its EBITDA by the end of 2020, from 4.2 times.

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Editing by Antony Currie and Amanda Gomez

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