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General Electric (GE) to Exit Lending Business and Sell $26.5B in Real Estate

By: , dated April 10th, 2015

Shares of the General Electric Company (GE) were trading up +2.39 or +9.29 percent in Friday's premarket after the company announced early this morning it would be exiting the bulk of its financing business, which would include the sale of most of the company's real estate for $26.5 billion. General Electric stock closed at $25.73, up +0.72 or +2.88 percent in Thursday's regular trading session.

Fairfield, Connecticut based General Electric is a U.S. based transnational conglomerate best known as a manufacturer of electrical appliances. The company, founded by Thomas Edison in 1892 has expanded into aviation, consumer electronics, oil and gas production and exploration, electric motors, locomotives, software, lighting, healthcare, energy and finance among other businesses. The company is divided into several divisions, which include Aviation, Capital, Energy Management, Healthcare, Oil and Gas, Power and Water and Transportation.

In the company's announcement early this morning, GE said that it will sell or spin off the bulk of its $500 billion GE Capital segment, which has been the source of approximately half of the company's profits but has exposed GE shareholders to a number of risks since the 2008-2009 financial crises. GE will keep the financing arm which supports its industrial operations including, the energy and healthcare businesses and the company's aircraft leasing operations.

The company said that it will spin off its retail finance and private label credit card businesses into a new company that will be called Synchrony Financial. In addition, GE has agreed to sell $26.5 billion in commercial real estate debt and office buildings to several buyers including Wells Fargo & Company (WFC) and the Blackstone Group LP (BX).

GE Chairman and Chief Executive Officer, Jeff Immelt said in the company's press release that, "This is a major step in our strategy to focus GE around its competitive advantages, GE today is a premier industrial and technology company with businesses in essential infrastructure industries. These businesses are leaders in technology, the Industrial Internet and advanced manufacturing. They are well-positioned in growth markets and are delivering superior customer outcomes, while achieving higher margins. They will be paired with a smaller GE Capital, whose businesses are aligned with GE's industrial growth."

The company's real estate holdings were the main concern, in addition to the fact that GE Capital is the nation's seventh largest bank, designating it by regulators as a SIFI or "significantly important financial institution" and held to stricter regulatory standards. GE noted that it could receive a dividend of as much as $35 billion from the sale of GE Capital assets and said that it would repurchase $50 billion of its stock.

The sale of assets and exit from its financing arm prompted Moody's Investor Service to downgrade GE's senior unsecured debt rating from A1 to Aa3. Nevertheless, Moody's left its rating on GE capital at A1. Russell Solomon, Moody's Senior Vice President and lead analyst for GE said that the actions "reflect our perception of a growing level of financial risk tolerance, in favor of equity holders and at the expense of creditors," and that, "The pending GE Capital asset sales, with virtually all benefits inuring to equity owners, taken together with high share repurchase activity and a high dividend payout in recent periods, and the liquidity-consuming Alstom acquisition that is still pending, reflect a noteworthy shift by GE to more aggressive financial policies."

GE stock is reflecting the market's approval for the restructuring. The stock has been stuck below $30 per share for a long time. With this morning's rally, the stock is up over two percent this year and could signal the beginning of a significant move higher.

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Jay Hawk Jay Hawk enjoyed a 12-year professional financial markets career incorporating extensive first hand futures and options experience obtained by trading in the stock, commodity and forex markets on U.S. exchanges. Since retiring as a full-time financial market professional, he has been actively trading stock, commodities, forex and options for his own account and managing funds for others, as well as writing financial market commentary and educational articles.

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