GE’s stock has been battered during this sell-off, falling much more than the broader market as a whole. Since reaching an intra-day peak of $13.26 on February 12 (roughly one month ago), the stock has fallen 40.8% to its March 13 close of $7.85. By comparison, the S&P 500 has fallen 19.8% over that same time frame.
The stock has also underperformed its peer group. Since February 12, the S&P 500 Industrials sector is down 26.5%. Among the 71 stocks in that sector, GE is the 8th worst performing, behind the airlines (American, United and Alaska Air), Boeing, Flowserve, United Rentals and Textron.
It is not so surprising that GE’s stock price performance should mirror these companies. GE’s Aviation business, its best performing business segment which generated nearly 70% of the company’s total segment profit in 2019, depends upon Boeing’s aircraft sales (including the 737 Max) and the general level of airline passenger traffic. (More traffic requires more frequent jet engine maintenance and also supports airline purchases of new aircraft.)
GE is also exposed to general trends in global economic activity. The steady and rapid march of the coronavirus threatens to disrupt both the demand for many of its products and their associated supply chains at least for a time.
While these exposures are well known to investors, there was an additional (but perhaps related) concern that arose last week which may have added to the selling pressure on GE’s stock. Reuters reported on Wednesday (3/11) that the cost to insure GE’s debt against default had jumped to levels last seen since 2018. Although the article cited no specific risks that would lead to a near-term default, it noted that the general decline in interest rates could boost the company’s pension and legacy insurance liabilities, which in turn could require additional cash infusions in the future. Others cited the general downside risks to the economy which could hurt GE’s profitability and cash flows.
One potential risk that may be on the minds of some holders of credit default swaps (CDSs) is the possible delay of GE’s pending sale of its BioPharma business to Danaher. The closing, originally scheduled to take place in the 2019 fourth quarter, is now expected in the 2020 first quarter (which ends in a little over two weeks). It is subject to regulatory approvals and other closing conditions.
The transaction has already been approved by regulators in the European Union and Korea. U.S. Justice Dept. approval is expected to come down to the wire, according to the CEO of Sartorius, which is acquiring some of Danaher’s businesses to comply with the terms of settlements with EU and Korean regulators. To my knowledge, there are no reports of regulatory approval requirements from other countries.
The closing of the transaction in 2020 is important to GE in order to meet its debt reduction goals and requirements. The sale will generate some $20 billion of cash. Management has said that it will use $12.2 billion of the proceeds to repay an intercompany loan from GE Capital.
GE Capital will then use the $12.2 billion to retire $16 billion of debt coming due during the year, including $11.2 billion of maturing long-term debt. The difference could be met by using some of GE Capital’s cash, which totaled $17.9 billion at December 31, 2020, excluding $0.9 billion that is subject to regulatory restrictions. GE Capital has no plans to issue any incremental senior unsecured debt until at least 2021.
CDS holders might possibly be concerned about Danaher’s ability to complete the purchase of GE BioPharma in light of the turmoil in the financial markets. However, the life sciences company has been raising cash since the acquisition was announced in February 2019. In March 2019, Danaher issued $3.0 billion of common stock and mandatory convertible preferred stock in a public offering. In the second half of 2019, it issued approximately $10.8 billion or euro- and U.S. dollar denominated debt. It intends to finance the remaining $7.2 billion with a combination of commercial paper issuance and cash-on-hand. In August 2019, the company put in place $10 billion of credit facilities to support the commercial paper issuance. The credit facilities were undrawn at December 31, 2019. At the end of 2019, Danaher had $19.9 billion in cash on its balance sheet.
Given the recent turmoil in the financial markets, which could continue for the balance of March and possibly beyond, it is conceivable that the closing of the transaction could be delayed beyond the 2020 first quarter – either from an inability of regulators to complete the work necessary to approve the deal in a timely fashion, an inability to satisfy other (unspecified) closing conditions, or financial market dislocations that somehow make it impossible (or undesirable) for Danaher to issue the commercial paper or borrow under its bank lines.
In the event that the BioPharma closing is delayed, GE Capital will probably cover its maturing debt requirements with a combination of cash on hand and funding from GE, which could borrow under its credit lines. At year-end 2019, GE had $14.5 billion of cash available on its balance sheet, excluding $2.6 billion in countries with currency control restrictions and $500 million of restricted cash. GE also had $35.3 billion in available credit facilities at the end of 2019, of which $14.8 billion expires at the end of 2020 and $20.0 billion at the end of 2021.
Assuming no significant downturn in the global economy, therefore, GE appears to have the financial resources to cover the maturing debt at GE Capital temporarily on its own, if necessary, during the course of 2020.
My analysis of GE Capital’s 2020 debt maturities indicates that nearly $9.0 billion is coming due in the 2020 fourth quarter. Thus, absent the BioPharma sale proceeds, GE Capital should experience only a modest drawdown of cash over the next six months. This should reduce some of the pressure that might accompany a delay in the closing beyond the 2020 first quarter.
Given the strategic importance of the acquisition for Danaher, the financing that it has already put in place and the conditional regulatory approvals already obtained in the EU and Korea, there appears to be little chance, in my opinion, that the deal will not get done. Although the closing may very well be delayed beyond the 2020 first quarter, I believe that there is a high probability that the transaction will close before the end of the summer.
On the flip side, if GE and Danaher are able to close the transaction within the next two weeks, that will provide some relief for GE shareholders and it may also be a positive catalyst for GE shares.
March 16, 2020
Stephen P. Percoco
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