
Why GE Gets a Cash Reward When an Old Business Goes Blue-Chip
Investors pondering whether to swap their General Electric (GE) - Get Report stock for discounted shares of former credit-card unit Synchrony Financial (SYF) - Get Report have a new wrinkle to consider: Synchrony's recent inclusion in the S&P 500.
The decision by index administrators to substitute Synchrony for Genworth Financial may push the stock up. That benefits GE because it can get back more of its own securities for each Synchrony share it gives up. GE holders who opt to go ahead with the swap, of course, get the other side of that transaction.
The bottom line, according to William Blair analyst Nick Heymann, is that the prospective spike in Synchrony stock is just one more reason to buy and hold GE.
The Fairfield, Conn.-based company's CEO, Jeffrey Immelt, is shedding most of the lucrative GE Capital lending business, of which Synchrony was a piece, as he refocuses on manufacturing operations from health-care equipment to jet engines and locomotives.
While accounting for a large share of GE's profit, the lending arm had weighed on the company's stock price since the 2008 financial crisis and subjected GE to increasingly stringent restrictions on how it could invest capital as regulators worked to insulate larger financial firms from economic hazards.
In addition to selling large pieces of the GE Capital portfolio outright, Immelt has offered investors $107.50 worth of Synchrony shares per $100 of GE stock, although he accounted for possible changes in the price spread by setting an upper-end limit on the exchange ratio.
The swap accomplishes two goals: enabling GE to divest an 85% stake in its one-time credit card distributor, spun off last year, and reducing the number of outstanding GE shares, thus pushing up the price. Synchrony traces its roots to the Depression, when GE began offering financing for home-appliance purchases to its cash-strapped customers.
"Demand for Synchrony by next Tuesday night [when the swap offer closes] will be higher, and the higher Synchrony goes, the better it is for GE, because they are going to be able to reduce their share count by more," Heymann said.
GE closed above $30 on Tuesday, a benchmark it hadn't touched since 2008, according to a William Blair report.
"One reason for yesterday's strength was the decision for Synchrony Financial to replace Genworth Financial in the S&P 500," according to the report. That may have "placed pressure on investors who had anticipated being able to tender GE shares and receive Synchrony shares at a discount."
Another reason investors should hang on to GE shares is the strong demand for its industrial products, according to the report.
Recent deals include a $16 billion engine-maintenance agreement with Dubai's Emirates airline on Monday, a $2.6 billion deal to supply India with 1,000 diesel locomotives, and an order for $1 billion worth of gas turbines in Indonesia.
The orders are indicators of Immelt's progress toward drawing 90% of GE's income from its industrial units by 2018, compared with just 55% last year.
William Blair maintains an "outperform" rating on GE, the equivalent of a buy, and has a $32 price target with "potential for $60" a share by 2020.








