Shares of General Electric Co. were set up for a potential breakout of a long trading range on Tuesday, after the industrial conglomerate announced plans to split up into three separate, publicly traded companies.
GE’s stock
GE,
has been bouncing around in a relatively narrow trading range of $100 to $110 (split-adjusted), with only occasional and brief peeks outside that range, for the past nine months. Read more about GE’s trading range.
On Tuesday, however, the stock shot up 6.1% in premarket trading, putting them on track to open at the highest price seen during regular trading hours since May 2018.
FactSet, MarketWatch
The rally comes after the company said it will eventually split into three, “well capitalized” and “investment-grade” companies focused on the aviation, healthcare and energy sectors.
The company said it plans a tax-free spinoff of GE Healthcare in early 2023, with GE expected to retain a 19.9% stake in the business.
GE will also combine its GE Renewable Energy, GE Power and GE Digital businesses, then spin that company off in early 2024.
The remaining GE will be an “aviation-focused” company.
“By creating three industry-leading, global public companies, each can benefit from greater focus, tailored capital allocation, and strategic flexibility to drive long-term growth and value for customers, investors, and employees,” Chief Executive Larry Culp said.
He said on the investor call following the announcement that the split will allow the separated businesses to “realize their full potential,” and will leave GE a “simpler, stronger and more focused” company.
The company expects to record one-time separation, transition and operational costs of about $2 billion and tax costs of less than $500 million from the transactions. And through the transition, the company said it will be able to cash in on its stakes in AerCap Holdings NV
AER,
and Baker Hughes Co.
BKR,
as well as its stake in Healthcare, to continue to pay down debt.
The company believes the split will create value for customers and shareholders, with benefits including deeper operational focus and agility to meet customer needs, capital allocation decisions based on industry-specific dynamics and “distinct and compelling” investment profiles to appeal to broader investor bases.
S&P Global Ratings said it has placed GE’s BBB+ credit rating on “CreditWatch with negative implications” after the plan to split, as the credit rating agency said it would view GE as “less diversified” following the separation of GE Heathcare. A BBB+ rating at S&P is three notches above speculative grade, or “junk” status.
“In the past year, the health care segment has been more resilient and contributed relatively stable profitability and cash flow given the impact of the COVID-19 pandemic on its aviation segment and while power remains in turnaround mode,” S&P said.
S&P said, however, that the remaining businesses benefit from strong market positions, with a gradual recovery expected for the aviation business and with expectations that power will further improve profitability.
Current GE CEO Culp will be nonexecutive chairman of GE Healthcare after it is spun off, and will continue as CEO and chairman of GE until the second spinoff, at which time he will lead the aviation-focused company.
Peter Arduini will assume the role of CEO of GE Healthcare on Jan. 1, 2022, and Scott Strazik, currently the CEO of GE Power, will be the CEO of the combined Renewable Energy, Power and Digital businesses.
GE’s stock has climbed 25.5% year to date through Monday, while the SPDR Industrial Select Sector exchange-traded fund
XLI,
has advanced 20.6% and the S&P 500 index
SPX,
has rallied 25.2%.
This post was originally published on Market Watch
