GE Announces $5bln. Debt Buy Back, Market Unmoved

GE Announces $5bln. Debt Buy Back, Market Unmoved
September 16, 2019


General Electric (NYSE: GE) has revealed its intention to repurchase debt worth $5 billion in an attempt to slash debt load, which will aid its turnaround in operations. The company’s buyback will include a combination of 2.5 billion of dollar debt and 2.28 billion of euro-denominated notes. The industrial giant has stated that it will not increase the size of repurchase. In March 2019, GE announced it is looking at the option of repurchasing debt. Notably, in January, the company released a statement saying that it does not anticipate issuing additional debt until 2021.

In other news, the company said it is increasing the number of Baker Hughes, a GE Company (NYSE: BHGE) shares which are planned to be sold to prospective investors. The company was formed through a merger between GE’s oil and gas division and Baker Hughes in the summer of 2017. However, the merger did not work out well for GE due to the global weakness in the oil and gas industry. The divestment plan is not new as BHGE and GE have been working towards separation for over a year. However, the increase in stake sale has mildly surprised the markets. The stock dropped 1.1% Friday to close at $9.26. Still, Boston-based company’s shares stand with a gain of 27% in 2019. The gains are not considered to be huge as the company had lost over $200 billion in market capitalization in the two year period ended December 31st, 2018, mainly due to a huge drop in profits amidst high costs and decline in demand for gas turbines.

The debt repurchase offer expires on October 9th. Investors who submit their bonds by September 25th may receive early participation premium. The dollar-denominated bonds, considered for repurchase, mature between 2022 and 2044. Likewise, the euro-denominated notes mature between 2022 and 2037. GE stated that dollar-debt and euro-debt worth $8 billion and $10.5 billion meets the repurchase criteria. The buyback is managed by Goldman Sachs Group Inc. and Bank of America Corp. D.F. King & Co. acts as the tender and information agent.

GE is one of the top ten largest corporate bond issuers in the Bloomberg Barclays US Corporate Bond index’ outside of the financial arena.

Bringing down the debt burden is one of the main objectives of CEO Larry Culp. The company is going through the worst slump in its 127-year history. Culp believes that debt reduction is a must for the company to achieve a turnaround in performance.  After becoming the CEO last year, Culp has been restructuring the company with focus on manufacturing jet engines, medical scanners, and power equipment, while managing the debt pile of $100 billion.

While speaking at a Morgan Stanley seminar, Culp stated that the company’s initiatives are in line with the plans revealed earlier. “We’re doing what we said we’d do. The reset year thus far here in early September is playing out fundamentally in line with what we anticipated, but we know we have a lot more to do both with respect to the balance sheet and the way we run the business.”

The company reaffirmed that it aims to cut debt to less than 2.5 times a measure of earnings and is exploring other options to reduce debt, including repayment of intercompany debt and pension funding. This implies GE will have to erase roughly $25 billion debt, from $51 billion at the end of Q2 2019. Culp believes that boosting profits will take additional time.

Regarding the Baker Hughes stake sale, the company expressed its willingness to sell 115 million shares of the oil field services enterprise, an increase from 105 million shares. GE has also fixed the sale price at $21.50 per share. In addition, Baker Hughes intends to repurchase $250 million of its own Class B shares (11,865,211) from GE using its own cash in hand. Overall, by divesting a portion of its stake in Baker Hughes, the company intends to realize revenues of $2.7 billion. If the underwriters exercise their rights to purchase additional shares, then GE may generate $3 billion from partial divestment of its holding in Baker Hughes.

Following the planned divestment, GE’s stake in BHGE will fall to 38.4%, down from its current level of over 50%. That would make GE a minority stakeholder in BHGE. Therefore, a change in BHGE board of directors is anticipated following the partial stake sale. BHGE may also remove the reference to GE from its official name. The deal is anticipated to close on September 16th.  It can be remembered that Baker Hughes and GE agreed to part ways in June 2018. Necessary agreements defining future relationship is already in place, including the $21.40 billion sale of its biopharmaceutical business to Danaher Corp. GE is on track to realize asset sales worth $38 billion.

The planned reduction of debt is expected to turn the stock bullish in the short-term.

The historical price chart shows that the stock has closed above its 50-day moving average. Furthermore, the Chaikin money flow indicator is having a positive reading. As a result, we can expect a rally in the stock soon.

GE - technical analysis - 16th Sept 2019

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Janine is our editor for related stock market news. Andrew and Janine will be focusing on providing the latest trends and where the next hit could be

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