Shares of General Electric Co. slumped Wednesday, after the industrial conglomerate confirmed a $30 billion deal with AerCap Holdings NV, while also surprisingly proposing a 1-for-8 reverse stock split.
GE, which hosted an analyst meeting early Wednesday, also provided 2021 financial guidance, in which the range for adjusted earnings was a bit downbeat, but the ranges for revenue and free cash flow were in line with expectations.
The stock GE, -6.29% swung dropped 6.0% in morning trading, putting it on track for the biggest one-day decline since Sept. 21, 2020, when it fell 7.7%. The decline comes after the stock had rallied 11.6% in March through Tuesday, including a 3-year high close of $14.17 on Monday, while the S&P 500 index SPX, +0.69% has gained 1.7% over the same time.
The reverse split might surprise investors because they are usually reserved for companies concerned that their stock price could, or have fallen below, thresholds that might lead mutual-fund investors to shun the stock or prompt exchanges to issue delisting notices. Read more about reverse stock splits.
In GE’s case, the company said its board was recommending the reserve split, which will be voted on by shareholders at the annual meeting in May, given the company’s “significant transformation” over the past several years.
“The reverse stock split would decrease the number of shares outstanding to a number more typical of companies with comparable market capitalization,” GE said in a statement.
GE had a market cap of $122.75 billion as of Tuesday’s stock closing price, and had 8.77 billion shares outstanding as of Jan. 31. In comparison, Lowes Companies Inc. LOW, +1.44%, with a market cap of $121.34 billion, has about 734 million shares outstanding, while Starbucks Corp. SBUX, +1.98%, with a market cap of $125.44 billion, has 1.18 billion shares outstanding.
GE’s proposed reverse split would effectively multiply the stock price by eight, while reducing the number of shares outstanding to about 1.1 billion. If the shareholders approve the split, the split will go into effect at the discretion of GE’s board, at any time before the first anniversary of the May 4, 2021 annual meeting.
GE confirms AerCap deal
GE confirmed Wednesday a deal to combine its GE Capital Aviation Services (GECAS) aircraft leasing business with AerCap, in a deal that creates more than $30 billion in value for GE shareholders.
Under terms of the deal, GE will receive $24 billion in cash and 111.5 million ordinary shares, with a market value of about $6 billion and representing a 46% ownership stake in the combined company.
GE said it plans to use the proceeds from the deal to further reduce debt, which would bring the total debt reduction since the end of 2018 to more than $70 billion.
The deal is part of a multi-year effort by GE to reduce risk at GE Capital, which is expected to have an estimated $21 billion in assets after the deal closes, down from $68 billion at the end of 2020. The deal is expected to close in nine to 12 months. And once the deal closes, those remaining assets will become part of the consolidated industrial balance sheet.
“Today marks GE’s transformation to a more focused, simpler, and stronger industrial company,” said Chief Executive Larry Culp.
“AerCap is the right partner for our exceptional GECAS team,” Culp said. “We’re creating an industry-leading aviation lessor with expertise, scale and reach to better serve customers around the world, while GE gains both cash and a meaningful stake in the stronger combined company, with flexibility to monetize as the aviation industry recovers.”
GE financial guidance
As part of its analyst day, GE provided details on its 2021 financial guidance.
The company expects full-year adjusted earnings per share of 15 cents to 25 cents, compared with the FactSet consensus of 25 cents.
For revenue, GE expects growth in the “low-single-digit” percentage range, while the current FactSet revenue consensus of $80.4 billion implies a 1.0% rise.
Free cash flow is expected to be $2.5 billion to $4.5 billion this year, which surrounds the FactSet consensus of $3.6 billion.
GE said its guidance is based on the assumption that the aviation market will start recovering in the second half of the year. GE assumes growth in the renewable energy market, an accelerating turnaround in the power business and sees an “attractive” health care market, with scans back to pre-COVID levels.
“We are on a positive trajectory in 2021 as momentum builds across our businesses and we transform to a more focused, simpler, and stronger industrial company,” CEO Culp said. “We are excited to shift more toward offense, investing in breakthrough technologies to serve the needs of our customers and the world—for more sustainable, reliable, and affordable energy; more integrated and personalized healthcare; and smarter and more efficient flight.”
GE’s stock has now rallied 16.2% over the past three months and soared 48.6% over the past 12 months. In comparison, the SPDR Industrial Select Sector exchange-traded fund XLI, +0.80% has advanced 36.6% over the past year and the S&P 500 has climbed 34.9%.