BREAKING UP IS HARD TO DO. Time to Break Up? “..a further dismantling of an already-shrinking empire..” By Todd Horwitz, BubbaTrading

 

Todd’s Daily Video Commentary can be found here: https://tinyurl.com/yb2gf9uk

BREAKING UP IS HARD TO DO

Time to Break Up?

General Electric, once America’s most successful conglomerate, could break itself apart. A breakup would represent a further dismantling of an already-shrinking empire that still makes everything from light bulbs and jet engines to MRI machines and power plants. John Flannery, the new CEO charged with engineering a turnaround at GE, signaled on Tuesday that the company is exploring a potential breakup as it tries to clean up messes from the past.

GE shares, down 40% in the past year, fell 2.9% more Tuesday after the company disclosed it would book a $6.2 billion charge in its fourth quarter related to its insurance operations and needed to set aside $15 billion over seven years to bolster insurance reserves at its GE Capital unit.

“We need to continue to move with purpose to reshape GE,” Mr. Flannery said on a conference call, promising to update investors in the spring. A breakup would come just a few months after Mr. Flannery unveiled his plan to turn around the struggling giant by focusing on its three core units: aviation, power and health care. In November, the longtime GE executive said he would divest $20 billion in assets, though he stopped short of the dramatic structural changes he disclosed Tuesday.

Some analysts are warning that dismantling GE won’t be a quick fix. “It would be destructive relative to where the current stock price is,” Cowen analyst Gautam Khanna said in an interview. Khanna said GE’s balance sheet is such a “mess” that it may be worth even less in a breakup scenario. He estimates the sum of GE’s parts is just $11 to $15 per share, compared with the current stock price of $18.

The problem is that GE’s various divisions in some ways benefit from being together. For instance, they enjoy easy access to cheap capital, GE’s well-known brand, shared services and a deep management bench. A breakup would remove that and include significant legal and tax costs. And GE has enormous debt and underfunded pension liabilities that must be accounted for. The only way a breakup makes sense, Khanna said, is if GE fears it’s worth even less kept intact because its businesses are in decline.

Keep those stops tight
Todd “Bubba” Horwitz

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About the author

Todd Horwitz - Author of “Average Joe Options“. Todd began his trading career in 1980 at the CBOE. He was one of the original traders in the OEX & helped start the SPX. He is a member the CME where he trades S&P futures as well as foreign currencies & is a regular contributor to CNBC, Bloomberg, BNN, Fox & many other major news networks.