John Flannery's plan for General Electric is a breakup - not a money-back guarantee. A fear that dismantling the US conglomerate will be fiddly and leave old problems unfixed may be why the market isn't giving credit for what could be a pretty big bump in value.
The most lucrative bit that Flannery wants to keep is GE's aviation division, where revenue is growing in the mid-single digits and production of the new LEAP engine is ramping up. Say EBITDA of $6.3 billion last year keeps growing at its nearly 10 percent pace until 2020, and is valued on an enterprise value-to-EBITDA multiple of 11, in line with Germany's MTU and France's Safran. It would be worth nearly $93 billion.
Power is more of a drag. Flannery's hope that demand for gas-fueled plants will rebound seems optimistic. If GE does no more than halve the 24 percent annual decline in EBITDA from now until 2020, the unit would have an enterprise value of almost $22 billion based on a similar 10 times multiple to rival Siemens. The smaller renewables division would add close to another $11 billion, if valued comparably to Denmark's Vestas. GE's 63 percent stake in oil services group Baker Hughes would, based on its current market price, bring in another $23 billion.
Then there's GE Capital. The loss-making financing arm will need $3 billion in capital from its parent in 2019. Assigning it a negative value of $10 billion is probably generous. All that adds up to nearly $139 billion. Shareholders also are due to receive 80 percent of the group's healthcare business, handed to them in a spinoff, which would be worth nearly $40 billion if valued in line with Philips and Siemens Healthineers. In sum, what shareholders would get after deducting aspirational net debt of $25 billion in 2020 is equivalent to $17.50 a share, 25 percent higher than GE's share price on July 9.
Much could go wrong. Restructuring costs could be greater than expected - and GE Capital has a history of producing large, unforeseen charges. The new GE also will still be much more highly leveraged than United Technologies and Honeywell . Besides, some context is needed: even at $17.50 per share, GE would barely be at half its level of two years ago. Chief Executive John Flannery on June 26 announced plans to spin off General Electric's healthcare business and sell its 62.5 percent stake in oil-services company Baker Hughes.