General Electric Company (NYSE:GE) will spin-off its GE Capital in an open-market IPO, according to Bloomberg. When the news provides coverage on a spin-off, there’s not a whole lot of substantiating detail that is provided to us, the investors.
Well, I am going to make an attempt at evaluating the GE spin-off. The analysis is an estimate using financial data that comes from the company’s annual report.
Fundamental assumptions
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Source: General Electric Company (NYSE:GE)
In Generally Accepted Accounting Principles a company must record an asset and a liability when lending money. So, for every one dollar in assets GE capital has, it also has a liability equivalent to it. To understand the total number of liabilities attributable to GE Capital’s lending we have to measure the total number of assets excluding cash and equivalents. It is an estimate though, so we have to be careful when making these assumptions. However it can be assumed that because GE Capital has $418.6 billion assets excluding cash and equivalents, the company also has $418.6 billion in long-term liabilities. Therefore, if the company were spun-off, the parent company would effectively reduce the amount of debt and assets on its balance sheet by $418.6 billion.
This means that GE capital is worth around $61.9 billion when you focus solely on cash and cash equivalents. Remember, cash and cash equivalents are assets that aren’t tied to debt (well at least it shouldn’t be as we have isolated the debt and assets to the $418.6 billion).
Deal structure
For illustrative purposes, I hoped to simplify the spin-off strategy to something fairly simple and intuitive to understand.
1. General Electric Company (NYSE:GE) will pay itself a special dividend of $61.9 billion (roughly equivalent to GE capital’s short-term cash, and equivalents). General Electric wouldn’t pay any taxes on the dividends because according to IRS tax code the dividend received deduction reduces taxes on dividends to 0% so as long as a company has an equity interest in the company that is greater than 80%).
2. General Electric Company (NYSE:GE) forfeits all of its shares in GE capital to GE capital after the special dividend.
3. GE capital will borrow an additional $61.9 billion to keep the amount of assets on its balance sheet equivalent to what it had prior to the spin-off. This will increase liabilities by a proportional amount.
4. GE Capital earns net income of $7.4 billion, so a $61.9 billion market capitalization would most likely float on the open stock market as the company would be priced at an 8.36 earnings multiple.
5. GE capital will raise $61.9 billion in capital by selling its stock onto the open market. This will offset the increase in liabilities. Because capital raised in public offerings, does not have to be repaid it would off-set the $61.9 billion increase in the companies liabilities.
6. GE capital after raising $61.9 billion in capital plus borrowing $61.9 billion would have a total of $125 billion or so in cash. GE capital can pay down the $61.9 billion in liabilities it incurred prior to IPO, to return the businesses balance sheet to the way it was prior to the spin-off.
The result for GE shareholders
The end result is that GE Capital is its own separate publicly traded entity with a similar amount of assets and liabilities prior to the company going public. General Electric Company (NYSE:GE) gets to shed $418.6 billion in liabilities off its balance sheet.
