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NEW YORK (
General Electric(GE - Get Report) will see a decline in earnings from the spinoff of its consumer finance business, but analysts expect the company to be more highly valued by investors as it refocuses on its industrial businesses.
GE on Friday announced it would spin off its North American consumer finance arm through a carefully crafted transaction that will be tax-free to GE shareholders and include an initial public offering of up to 20% of the equity in the new company. Following the IPO, which the company expects to complete "later in 2014," the company plans to completely exit the consumer finance business by making a tax-free distribution of the remaining 80% to GE shareholders during 2015.
The company also said it might decide to complete the disposal of the consumer finance arm by "selling or otherwise distributing or disposing of all or a portion of its remaining interest in the Retail Finance shares."
What does this mean for investors?
For one thing, it is a major piece of Jeff Immelt's long-term strategy to trim GE Capital's contribution to General Electric's earnings to roughly 30%. During the third quarter, GE Capital's contribution to the parent company's operating income was 49%. For the first three quarters of 2013, the finance unit's contribution to the parent's operating earnings was 46%. GE Capital had $515 billion in total assets as of Sept. 30, declining from $562 in September 2013. The unit's "ending net investment" (ENI), excluding non-interest bearing liabilities, cash and equivalents, was $385 billion as of Sept. 30, down from $425 billion a year earlier.
GE Capital will shed another $50 billion or so through the spinoff of the consumer finance unit, bringing the unit within Immelt's long-term ENI target range of $300 billion to $350 billion.
The long-term initiative to trim GE Capital, while improving the unit's liquidity, is aimed at allowing GE to continue providing middle market commercial financing and continue to lend to its industrial customers, while avoiding the type of crisis the company faced in 2008. At the height of the U.S. credit crisis, liquidity in the commercial paper market dried up, forcing GE to rely on the Federal Deposit Insurance Corp.'s Temporary Liquidity Guarantee Program (TLGF) and the
Federal Reserve Bank of New York's Term Asset Backed Securities Loan Facility (TALF).
Illustrating the great strengthening of its balance sheet, GE reported that its ratio of debt to equity was lowered to as of Sept. 30 from 9.6 at at the end of 2008.