What Will Happen To A Standalone GE Aviation After GE Breaks Up?
Seen from the ongoing trend ruling large Western conglomerates in recent years, the newly unveiled breakup of General Electric (GE) into three companies—aviation, health care and energy—is just the latest example of multi-industrial behemoths spinning apart with aerospace a key end-market.
But for the aerospace and defense (A&D) industry, the breakup of GE spurs immediate brainstorming over how GE Aviation could combine with other A&D assets to form the next industry gargantuan.
“An open question is GE Aviation’s strategic direction/intent in the mid-2020s,” notes Capital Alpha Partners analyst Byron Callan. What is known now as GE Aviation—but which will remain simply GE after the health care and energy spinoffs occur by 2024—could mirror the former United Technologies, which spun off its elevator and air conditioning businesses and then merged the remaining Pratt & Whitney and Collins Aerospace divisions with defense prime Raytheon in 2019 to form the current industry giant Raytheon Technologies.
Or, GE Aviation could merge with or acquire other defense firms, though part of this course may be determined by U.S.-China relations and how China reacts to civil-military fusion by U.S. aerospace, Callan says. But it may also be shaped by Raytheon Technologies’ competitiveness. It is even possible that GE combines with someone in Europe, “but we don’t see obvious engine or avionics candidates in the U.S.,” he adds.
Still, there will be a lot of time to ponder the possibilities, because first GE has to go through a carefully orchestrated devolution that will take years and include mopping up of earlier divestitures, including the recently closed sale of GE Capital Aviation Services (GECAS) to mega-lessor AerCap, where GE owns 46%, and as GE Aviation crawls out of the historic trough in commercial aviation caused by the COVID-19 pandemic. On top of all that, GE continues to rebuild its balance sheet after a massive debt buildup under prior leadership.
In an early-morning announcement Nov. 9, GE said it plans to spin off its GE Healthcare arm in early 2023 and follow with the Renewable Energy and Power business in early 2024. The company says the capital structures, brands and leadership teams for each independent company will be determined and announced later. GE expects to retain a 19.9% share in the Healthcare company while GE Renewable Energy, GE Power, and GE Digital will be merged into a single entity before being spun-off in early 2024.
The logic follows a trend popular on Wall Street and elsewhere where companies become more singularly focused on end-markets, making investment decisions and cost-cutting moves appropriate for that line of business. Likewise, shareholders increasingly have desired to choose on their own how to diversify market plays within their own stock portfolios, rather than depending on a multi-industrial giant—with potential inefficiencies—to do it for them.
To that effect, GE Chairman and CEO Lawrence Culp said, “By creating three industry-leading, global public companies, each can benefit from greater focus, tailored capital allocation, and strategic flexibility to drive long-term growth and value for customers, investors, and employees.”
Current GE Aviation CEO John Slattery will remain at the helm of the division while Culp will serve as non-executive chairman of the GE Healthcare company upon its spin-off. Culp will also continue to serve as chairman and CEO of GE until the second spin-off, at which point he will “lead” the remaining GE aviation-focused company, but which apparently will also include the remnants of the former GE Capital division, whose insurance liabilities are being run down. There is no “anticipated” effect to manufacturing facilities or employees at this time, spokespeople say.
“As we look to our future, I continue to be humbled and inspired by GE Aviation’s past,” Slattery said on LinkedIn after the announcement. “Innovation is core to who we are and who we will continue to be as we embark on this next chapter. I am grateful for the commitment and dedication of my colleagues all across GE Aviation. You are the best and brightest, working day-in-and-day-out to deliver for the world. It is because of all of you that we can look ahead to this new chapter with such enthusiasm and optimism.”
The aviation-focused future GE should start its standalone life with installed bases of 37,00 commercial aircraft engines and 26,500 military engines. GE today counts a $380 billion backlog of work, 70% of which is in aviation. “Virtually all of that is in services,” Culp said during a teleconference.
GE’s split decision comes less than a month after the company posted better-than-expected third-quarter earnings partially with profit from higher engine shop visit rates. This, together with renewed orders, indicated the aviation unit is bouncing back faster than anticipated from the impacts of COVID-19 and the recent turmoil in the aerospace industry supply chain. Earnings jumped to $0.57 a share in the third quarter, significantly better than analysts had predicted.
In an initial debt review after the announcement, credit rating agency Fitch reaffirmed its stable outlook on GE as it exists. But one condition is 2021 being a stable year for commercial aviation, followed by steady improvement in 2022, the agency said.
With its current multi-industrial portfolio, GE remains on track to cut debt by more than $75 billion by the end of 2021 from when Culp took over and is now on track to bring its net-debt-to-pretax earnings ratio to less than 2.5x in 2023. The company now expects to achieve high-single-digit free cash flow margins in 2023.