According to a Bloomberg report, industrial goods manufacturer General Electric Company (NYSE:GE) is likely to divest its vehicle fleet management business worth $9 billion. The company is reportedly in advanced stages of negotiation with Toronto-based financial services firm Element Financial Corp.
The held-for-sale business includes leasing and fleet management of 1.4 million autos and trucks of large companies primarily in the U.S. Although GE and Element Financial have not confirmed the industry speculations, sources familiar with the proceedings expect the deal to be finalized by the end of the current quarter. This would be the second such acquisition for Element Financial, if the transaction goes through, after it bought the Canadian fleet portfolio of General Electric in 2013 for C$570 million.
The asset sale is part of the long-term strategy of General Electric to divest its various non-core operations in order to focus more on its industrial businesses. The restructuring initiatives of this Zacks Rank #5 (Strong Sell) company will likely result in a simpler and nimbler firm with a re-focus on its core industrial roots.
In accordance with the plan, Jeff Immelt – the Chairman and CEO of the company – has vouched to divest most of the financial units under GE Capital over the next 24 months. The financial operations that would be retained by the company will include financing verticals like GE Capital Aviation Services, Energy Financial Services and Healthcare Equipment Finance. These units are directly related to the core industrial operations of the company and will thus form an integral part of its corporate activities.
The GE Capital businesses that will be retained by the company will account for about $90 billion in ending net investments (ENI), which represent the total capital invested in its financial businesses. This would be a dramatic improvement for General Electric, which has been actively reducing ENI to mitigate operating risks and shield itself from intense market volatilities. The company had successfully reduced ENI from $538 billion in 2008 to $363 billion at the end of 2014. General Electric is expected to further reduce ENI by an additional $75 billion with the complete separation of Synchrony Financial by end 2015.
Immelt’s restructuring plan also included the sale of over 4,400 properties, including warehouses, factories, malls, apartment buildings and other commercial properties of GE Capital Real Estate. The real estate assets accounted for about 7% of the aggregate GE Capital assets worth $499 billion at 2014 end. The CEO must have considered it to be the most opportune time to sell these assets when the markets were relatively high. This might also have been triggered by the Federal Reserve’s decision to raise interest rates later this year, which would push up financing costs. The assets were sold to a consortium, led by investment management firm The Blackstone Group L.P. and Wells Fargo & Company, for approximately $26.5 billion.
The strategic moves seem to be the call of the hour as General Electric has underperformed the S&P 500 over the past one year, with an average return of 3.2% compared to 10.2% for the benchmark index. This proves that the share prices of General Electric have remained sluggish in recent times despite the ongoing restructuring process. Whether the radical steps taken by the company will ultimately boost prices remain to be seen.