GE to Exit Retail Lending, Tightening Focus on Industrial Businesses

GE to Exit Retail Lending, Tightening Focus on Industrial Businesses

Conglomerate’s Plan Includes Partial Sale of Business Early Next Year

KATE LINEBAUGH

Updated Nov. 15, 2013 7:11 p.m. ET

General Electric Co. GE +0.78% plans to exit the retail lending business—the conglomerate’s most aggressive move yet to shrink the size of its financing arm, which still generates half its profit. GE said Friday it will file for an initial public offering of its North American retail finance operations in next year’s first quarter. It plans to sell 20% of the unit to raise cash to better capitalize the stand-alone operations.The company expects to split off the business the following year by distributing the rest of the stock to GE’s shareholders, though it said it may pursue a sale instead.

The conglomerate’s North American retail business supplies store credit cards and financing for sales on credit used by 55 million Americans at retailers such as Wal-Mart Stores Inc. WMT +0.18% and Gap Inc.GPS +0.24% ‘s Banana Republic.

It is highly profitable and earned $2.2 billion last year. The operation accounts for about $53 billion of receivables, with the lion’s share—roughly $36 billion—from the private-label credit card business.

The retail business could have a market value of $18 billion to $20 billion, according to analysts at Bernstein Research. Credit card company Discover Financial Services has a market capitalization of about $25 billion.

GE relies heavily on its financing businesses to fuel its profits, generate cash to buy back stock or make acquisitions, and provide sizable tax benefits. The arm, GE Capital, by itself would rank as the country’s fifth-largest commercial bank.

But GE is moving to reduce its lending business under pressure from shareholders, who value the company’s industrial operations more highly.

“This is a huge step for us,” GE Capital Chief Executive Keith Sherin said Friday at an investor presentation in Norwalk, Conn.

GE shares gained 21 cents to $27.20 at 4 p.m. on Friday. The shares have gained 30% so far this year, outpacing the Dow Jones Industrial Average, which is up 22% for the year.

The Wall Street Journal reported this summer that GE was planning to spin off the unit. The move would shrink GE Capital’s earnings from an estimated $7.7 billion this year to $5 billion in 2015 after the split off is complete.

GE has been reducing its lending operation after the financial crisis upended the business, causing GE’s share price to plunge to single digits, forcing a dividend cut and raising questions about the future of the company.

The lending operation has shrunk substantially in the past five years and came under tighter regulatory oversight by the Federal Reserve.

About half of the company’s profit came from GE Capital in the first nine months of this year, and GE wants to pare that contribution to closer to a third by the end of 2015. The retail split off will be the last major action toward that goal, the company said Friday.

To make up for the lost earnings, GE is contemplating an unusual structure for the splitoff planned for 2015. Stock in the retail finance unit will be offered to shareholders, but they will have to spend GE stock to buy it.

GE said the method will be tax-efficient and help the company improve its earnings per share by reducing its outstanding share count. The company wants to reduce its outstanding shares to 9.5 billion from more than 10 billion currently.

GE is also working to improve profitability by lowering costs over the next several years. Last year, GE’s selling, general and administrative expenses totaled $17.7 billion, about 17% of the company’s $103 billion in sales. The company wants to bring that down to 12% by 2016.

After the split, GE Capital will focus on making loans to midsize businesses, an operation that is expected to account for more than half of the finance unit’s assets in 2015, up from 42% today. At the same time, its consumer operations will shrink to between 10% and 15% from 30%.