GE ponders further break-up of its empire

General Electric is looking at a further break-up, its chief executive said on Tuesday, extending its retreat from the conglomerate model it championed in the Jack Welch era.

John Flannery, who took over at GE last August, told analysts on a call that the company was examining options for its power equipment, aviation and healthcare divisions that "could result in many, many different permutations, including separately traded assets really in any one of our units".

The partial or total spin-offs under consideration would represent the latest step in dismantling the sprawling conglomerate built under Mr Welch, who ran GE from 1981 to 2001 as it expanded in areas as diverse as financial services and reality television.

Liabilities

Mr Flannery was speaking as GE pledged to pay $15 billion over the next seven years to cover continuing liabilities from insurance businesses that it sold more than a decade ago, shocking investors with the scale of the new charges.

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GE reports earnings for the fourth quarter of 2017 next week, and the payments will mean taking a charge of $9.5 billion before tax and $6.2 billion after tax.

The company sold its insurance operations between 2004 and 2006 but was left with a legacy portfolio, mostly of long-term care policies. A review of its remaining liabilities launched last year identified the need for extra payments of $3bn next month and a further $2 billion every year until 2024.

The charges are the latest blow for GE, which has been struggling as a result of downturns in some of its key markets, including power generation equipment and oilfield services. The company cut its dividend last year for only the second time since 1938.

Mr Flannery, who has been battling to turn GE round, described the insurance charge as “deeply disappointing” at a time when “we are moving forward as a company”.

The purpose of the possible restructuring, Mr Flannery said, would be to give the group’s three core operating divisions – power equipment, aviation and healthcare – “flexibility to maximise the business potential” while maintaining “operating rigour”.

Structure

He said: “I believe there could be different structures that can achieve all of those objectives and that we need to examine those.”

Possible precedents for the restructuring could include Synchrony Financial, the consumer credit business that was spun off partially and then completely, and Baker Hughes, the oilfield services group in which GE retains a 62.5 per cent stake. Mr Flannery said the company would give an update on its proposed restructuring in the spring.

A further break-up of the group would continue the process begun under Mr Flannery's predecessor, Jeff Immelt, who withdrew GE from industries including insurance, plastics and entertainment, and in 2015 launched the sale of most of the financial services division, which at times had provided more than half the group's profits.

Mr Flannery has already announced the planned sales of GE’s transport division, which makes diesel locomotives, and Current, its lighting and energy management business.

Paying for the insurance liabilities will also means further asset sales from the remaining businesses of GE Capital, the financial services division. GE plans to cut those back from $76 billion of assets at the end of last year to about $60bn by the end of next year. GE Capital will not pay a dividend to its parent group “for the foreseeable future”, the company said.

Deals

The roots of GE’s insurance problems lie in the tenure of Mr Welch, who led the group further away from its industrial roots with an ambitious series of deals, buying insurance companies including ERC in 1984 and Life of Virginia in 1996.

Mr Immelt got out of the business, spinning off some operations such as Genworth Financial in 2004 and selling ERC in 2006.

Those deals raised $13 billion in cash and took $130 billion of insurance risk off the balance sheet. But to get those terms, GE had to retain a tail of long-term care and annuity liabilities on the balance sheet, and the cost of those policies has turned out to be much greater than expected.

Like other companies in the long-term care insurance business, GE has been caught out by people living longer than was expected in the 1990s and early 2000s, meaning costs have been higher. Low interest rates have also hit investment returns, increasing the stress on the legacy operation.

While revealing its insurance charges, GE also gave more detail on the expected impact of the corporate tax cut. It plans to take a $3.4 billion charge in the fourth quarter, reflecting the reduced value of tax losses and the new charge on foreign earnings.

Jamie Miller, chief financial officer, said she expected the net cash effect over the next few years to be "small", and the company's effective tax rate to be in the "low to mid-20s [per cent]" in the longer term. That would be a higher tax charge than GE has paid for many years.

– Copyright The Financial Times Limited 2018