Why GE's $22 Billion Synchrony Offer May Not Be as Sweet as It Looks
If you thought General Electric's (GE) - Get Report share-swap for Synchrony Financial (SYF) - Get Reportwas a bad deal before, it may be getting worse.
Since GE began its mid-October offer to give investors $107.53 worth of Synchrony shares for every $100 of GE stock they turned in, GE's shares have risen by as much as 2%while Synchrony's have dropped as much as 2%.
The problem? GE has set a limit on the amount of Synchrony stock it's willing to swap for each GE share, and if the spread between the two tightens too much, the stocks may reach that ceiling, eating into the discount.
GE is making the offer in an attempt to shed its 85% stake in Synchrony,which was spun off from the Fairfield, Conn.-based manufacturer last year. The private-label credit card issuer was once part of the lucrative GE Capital lending arm that CEO Jeff Immelt is winding down to focus on the company's manufacturing roots.
Currently slated to end on Nov. 16, the offer caps the share swap at 1.1308 Synchrony shares for each share of GE. At prices on Friday, when GE closed at $28.92 a share and Synchrony at $30.76 a share, the Fairfield, Conn.-based industrial giant would still have made good on the discount, with swappers receiving 1.012 Synchrony shares for each GE share.
But as the valuations get closer, the ceiling could curb returns for GE holders who accept the offer, according to the deal prospectus. Ultimately, the swap will be based on the average prices of GE and Synchrony over a three-day period before the deadline.
"IF THE UPPER LIMIT IS IN EFFECT, YOU WILL RECEIVE LESS THAN $107.53 OF SYNCHRONY COMMON STOCK FOR EACH $100 OF GE COMMON STOCK THAT YOU TENDER, AND YOU COULD RECEIVE MUCH LESS," GE reported in a blaring, all-caps, page-one warning in the offer.
In order to trip the threshold that would begin to dissolve the discount, prices would need to further converge, with GE shares rising 12%, Synchrony dipping by 11%, or a combination of the two directions.
GE's holding in Synchrony, founded during the Great Depression to provide financing for household appliances to cash-strapped GE customers, is valued at about $22 billion.
Another factor investors should consider is that Synchrony, at least so far, doesn't pay cash dividends like GE. "Synchrony's board of drectors intends to consider Synchrony's policy regarding the payment and amount of dividends," according to the prospectus.
Immelt, GE's CEO, hopes that exiting Synchrony and most of the GE Capital lending businesses will enable GE to escape its designation as a Systemically Important Financial Institution (SIFI) by regulators, an action that increased federal oversight and limited how the company invests its capital.
The SIFI label, designed to curb risk-taking at companies so large their collapse would imperil the financial system, was part of the government's efforts to prevent a recurrence of the 2008 financial crisis, when companies such as American International Group, Bank of America and Citigroup were forced to take billions of dollars in bailouts.
In addition to helping Immelt divest Synchrony with tax-free treatment under existing law, the exchange is intended to benefit GE shareholders. Each share of GE that is returned to the company will be "retired," theoretically boosting the value of the remaining stock.
Speculators are already positioning themselves to profit off price gaps in the GE exchange ahead of the mid-November deadline, according to Nick Heymann, an analyst with William Blair.
"There's all kinds of voodoo going on," he said in a phone interview.