November 15, 2013 / 2:25 PM / 4 years ago

GE plans credit card unit spinoff to shrink finance arm

NORWALK, Connecticut (Reuters) - General Electric Co (GE.N) will spin off its credit card business next year into a separately traded company as it tries to reduce its exposure to unpredictable financial businesses and return to its manufacturing roots.

The new company should be worth roughly $16 billion to $18 billion, bankers estimate, equal to about 6 percent of GE’s overall market value.

The initial public offering of roughly 20 percent of the credit card business will help GE better focus on its industrial divisions, which makes locomotives, jet engines, dishwashers and scores of other goods, executives said.

Since the financial crisis, GE’s share performance has lagged rivals like Honeywell International Inc (HON.N) and United Technologies Corp, (UTX.N), which have much smaller financing arms.

At one time, the GE Capital unit, which houses the company’s financial operations, contributed nearly half of GE’s total profit. But the unit’s rising funding costs during the 2008 financial crisis nearly sank the entire company, prompting executives to try to scale it down.

After the spinoff, GE Capital will help finance medical equipment and other big-ticket items that the company produces.

The unit that GE is spinning off makes credit card loans to consumers in North America. The cards are usually offered through retailers like Pep Boys PBY.N, La-Z-Boy Inc (LZB.N) and Wal-Mart Stores Inc (WMT.N), and carry those retailers brands.

The unit also makes personal loans to consumers to cover expenses for things like vacations and medical procedures.

“This is the right business for GE to exit,” said Keith Sherin, head of GE Capital.

Asked why the spinoff did not include the international part of the retail finance business, Sherin said that would make the transaction much more complicated.

GE, which has not yet named the company, will start the spinoff next year with the IPO. In 2015, GE will give its shareholders the chance to swap GE stock for shares of the new business.

It may also sell some part of the business to other investors or companies, but it has tried and failed to sell its credit card business before, sources have told Reuters.

Compensation for Immelt and other senior GE executives, who do not have golden parachutes, is tied to how quickly they can shrink the company’s financial portfolio, according to regulatory filings.

The spinoff is expected to reduce GE’s total outstanding shares to about 9 billion to 9.5 billion from roughly 10.12 billion today.

GE Capital was named a systemically risky financial institution last summer by the U.S. Financial Stability Oversight Council. The designation, commonly known as “Too Big To Fail,” in effect guaranteed more regulatory oversight of GE Capital.

GE views the spinoff as its “last major action” in reducing profit from its GE Capital unit to 30 percent of the overall company total, executives said in a presentation Friday. The remaining profit comes from selling goods ranging from locomotives to jet engines to dishwashers.

GE shares rose nearly 1 percent to $27.25.


GE could not sell the business previously because very few banks are big enough to buy it, said Robert Hammer, the chief executive of R.K. Hammer Investment Bankers, which brokers card portfolio sales and has managed private label credit card companies.

    With losses on credit card loans declining across the industry, the valuations for these businesses could rise, Hammer added.

    “This is a pretty good time to divest or spin off the business,” he said.

    But GE executives acknowledged the economic recovery remains tepid.

    “I hope the market conditions continue to be favorable for something like this” Sherin said after the presentation, speaking of the IPO.

    One question that could affect the IPO valuation is how much debt it takes on and how the business finances itself in the future.

    The GE spinoff comes as Spanish bank Santander’ (SAN.MC) is getting ready to spin off it U.S. auto lending arm, called Santander Consumer USA. That offering is expected in the coming months and could indicate how much demand there is for GE’s business, a banker said.

    If the company’s market capitalization were around $16 billion, it would be smaller than credit card company Discover Financial Services (DFS.N) and larger than CIT Inc (CIT.N).

    GE Capital, which includes all of the company’s financial units, posted revenue of $46 billion last year. Sherin expects GE Capital’s profit to dip in 2014 and 2015 as it divests the retail finance business, but to grow in line with its industrial businesses starting in 2016.

    Proceeds from the IPO will be used to fund the new company, and Sherin said GE would focus next year on making sure it can operate independently.

    Sherin said GE had not yet determined whether it would need to add more cash to the new company beyond the IPO proceeds, noting the company would have to meet whatever the regulatory standards are for capital requirements.

    Additional reporting by Jessica Toonkel and Dan Wilchins in New York; Editing by Gerald E. McCormick, Jeffrey Benkoe and Jim Marshall

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