General Electric today shocked the stock market with news that ended up pushing its share price considerably higher. It’s selling its BioPharma unit for $21.4 billion to pay down its crippling debt.
GE investors applauded the company for taking its leverage ratio down. They sent the stock price higher by as much as 17% before the opening bell, though the company pared those gains during morning trading.
The lucky buyer is Danaher Corp., which was once helmed by current General Electric CEO Larry Culp. Culp served as CEO of Danaher from 2001 to 2014.
GE, Danaher Shares Spike after $21 Billion Deal
While Wall Street has been well informed of the company’s deleveraging efforts, this sale is significant, and not just because of its $21 billion price tag. Crucially, it shows that the company is willing to do what it takes to right its floundering financial ship.
General Electric’s stock soared 34.4% over the past three months through last Friday, while Danaher shares climbed 10.8%, according to The Street.
Here’s a look at both of their trading charts following the BioPharma announcement. First, here’s GE, which is trading above $11 as of the time of writing.
Danaher’s stock is on the move higher, too, and it’s not shaking its pre-bell gains.
Danaher will finance the deal with $3 billion from an equity offering, cash on hand, and the issuance of debt. After the deal closes later this year, its net earnings per share will fall by $1.15 to $1.20 in the first full year.
Tom Joyce, the CEO of Danaher, said GE BioPharma is renowned for providing best-in-class bioprocessing technologies and solutions. He added that the buy would add to its suite of products in its life sciences portfolio.
GE Taking ‘Deliberate Action’ to Strengthen Balance Sheet
The BioPharma unit is part of GE Healthcare. In 2018, GE Healthcare generated approximately $17 billion of revenue with mid-teens operating profit margins, and that’s not counting the estimated $3 billion from the BioPharma unit.
In the company’s last earnings report, Culp indicated that GE would be taking steps to deleverage the company’s balance sheet. At the time, he mentioned that its power unit would be the first to be analyzed. The strategy GE has embarked on includes setting stricter priorities across the company.
“Our strategy is clear: de-leverage our balance sheet and strengthen our businesses, starting with Power. To do this, we are improving execution, customer focus, and how we set priorities across GE. I’m confident in our team, technology, and the global reach of GE’s brand and relationships. We have more work to do, but I’m encouraged by the changes we’re making to strengthen GE and create value for our shareholders, customers, and employees.”
Culp said the deal was a pivotal milestone.
“It demonstrates that we are executing on our strategy by taking thoughtful and deliberate action to reduce leverage and strengthen our balance sheet.”
IPO Market Won’t See GE Healthcare
GE had been expected to put its healthcare unit on the IPO market this year. It had been valued at about $65 billion, which would have likely been the second-largest IPO this year. First is expected to be Uber with a $76 billion valuation. Next could be WeWork with a $47 billion valuation.
However, Culp told CNBC that the Danaher deal was “clearly a superior path” to spinning off its healthcare unit into a public entity and that a GE Healthcare IPO “looks unlikely” for 2019.
Power Unit Still A Drag
Outside of putting the brakes on an expected IPO, General Electric’s healthcare unit will not be affected significantly by the sale, but doubt remains about its power unit. GE said that weakness in the unit will cause it to miss 2018 free cash flow and earnings guidance as it takes a $23 billion goodwill hit to the struggling division, according to The Street.
Other efforts to de-leverage its balance sheet have included:
- Reducing the quarterly dividend
- Signing or completing the $20 billion asset disposition program for GE Industrial
- Completing $8 billion of asset sales and other actions for GE Capital
- Reaching an agreement with the U.S. Department of Justice to settle a Financial Institutions Reform, Recovery, and Enforcement Act investigation
Later this week, General Electric will publish its annual report.
Featured Image from Shutterstock. Price Charts from TradingView.
Last modified: September 23, 2020 12:27 PM