GE to Refocus on Power Division with Spin-Off of Health Unit

General Electric Company's stock has seen a 0.05% decrease.

At the start of 2023, GE will take a major step in its restructuring process by separating its healthcare unit. The remainder of the year will bring speculation about the company's next move, which is likely to involve divesting its power businesses.

This week, GE HealthCare Technologies Inc. will begin trading, leaving the expansive conglomerate with three divisions: jet engines, gas turbines powered by natural gas, and wind turbines. It is anticipated that the gas and wind turbines will be merged with other GE energy businesses to form a new company called GE Vernova, which is expected to separate in early 2024.

GE's power-generation business, which has been around since the company's inception, has been a source of losses, accounting issues, and worries about its reliance on fossil fuels in recent times as the world shifts towards more sustainable energy sources. The onshore wind-turbine sector has also been facing cost increases and supply-chain difficulties.

Nigel Coe, an analyst with Wolfe Research, believes that the breakup of GE is the most effective way to make sense of the company's equity story. Investors are left to ponder whether GE will be seen as a viable aviation story in the near future or if the risks associated with GE Vernova will keep them from investing until 2023.

Larry Culp, the CEO of GE, has declared that the spinoffs will bring more attention and responsibility to the company he has been restructuring since 2018. Culp intends to remain as the CEO of GE Aerospace, the largest and most lucrative unit.

Scott Strazik, the CEO of GE Vernova, has been given a year to prepare the company for public trading. He has already managed to turn the power business from a cash-flow negative to a cash-flow positive, which had been burning through around $2.7 billion in 2018. Currently, he is restructuring the renewables business, which is projected to have a loss of approximately $2 billion this year.

Mr. Strazik stated in an interview that the journey for gas power is nearly complete. He also believes that wind power will follow a similar pattern, with the first year being used to establish a foundation and the second year being used to make a substantial improvement.

After years of restructuring, the Boston conglomerate has decided to split into three parts. This move is intended to streamline their operations and make their assets more appealing to investors. The restructuring has included the sale of entire divisions and a shift in the company's management philosophy.

Scott Davis, CEO of Melius Research and an industrial analyst who has been following GE for over two decades, commented that once the company splits, it will attract a new group of investors. He noted that investor enthusiasm for GE has been low prior to the breakup, but he believes the spinoffs could alter that.

Mr. Davis has predicted that GE Aerospace could be worth $94 billion in 2024, GE HealthCare would be valued at approximately $48 billion, and GE Vernova would be worth less than $13 billion.

Mr. Davis expressed his opinion that healthcare would be alright even if it didn't perform well in the market. He noted that it is a reliable business and a well-known name. He also commented that aerospace has a lot of potential and will likely draw in investors, but GE power has very little appeal.

GE HealthCare's new shares will be available for trading on January 4th, but the stock has already been trading on a "when issued" basis at around $60. This type of trading allows investors to determine the market value of spinoff stocks before the official split.

GE's power business has not been a major topic of discussion in the past year, but it is now receiving more attention. The company believes that the gas market will remain steady in the next decade and that gas will be a major factor in the shift to renewable energy sources. The division is now being more selective when it comes to taking on projects, rather than just aiming to increase its market share.

David Giroux, the chief investment officer of T. Rowe Price Investment Management Inc., expressed his optimism that the renewables business will experience a turnaround similar to that of the gas power division, which has been successful in its operations. His company reported that it owned 2.1% of GE shares outstanding as of the end of September.

Following the GE HealthCare division's separation, Mr. Giroux anticipates that the majority of investor focus will stay on Aerospace. "The majority of the enterprise value, more than 80%, will be Aerospace," he stated. "The core Aerospace business is expected to experience a very strong recovery over the next five years."

GE Vernova's head, Mr. Strazik, expressed his belief that the company will gain from the Inflation Reduction Act, which offers tax credits for wind-power producers for a number of years. He anticipates that orders will rise in 2023 due to the law, and revenue will follow suit in 2024 from those orders.

GE's large number of gas turbines in operation create a reliable source of income for maintenance services. Additionally, these turbines provide an opportunity for conversations with utilities as they look to make their equipment more efficient and incorporate renewable energy sources such as wind or small-scale nuclear into their power production, according to Mr. Strazik.

Mr. Strazik noted that infrastructure investments can be complicated and don't always follow a linear path. He added that few companies have the capability to cover the range of technologies that they do.

Evelyn Chow, a senior research analyst at Neuberger Berman, believes that combining gas-power operations with renewable energy sources is a good idea since they both serve the same customers. However, the market for gas-power turbines has seen a decrease in the past decade.

Ms. Chow, whose firm owns a significant portion of GE shares, believes that having a company that solely focuses on renewable energy is a more attractive option for investors. She also noted that power is a necessary cost to obtain renewable energy.

GE Vernova faces a new challenge due to Wall Street's heightened attention to ESG (environmental, social, and governance) criteria when making investments. Although GE is no longer involved in constructing coal-burning power plants, the power business still sells machines that consume a great deal of natural gas.GE is attempting to reduce the amount of pollution caused by its machines. The gas-power division is attempting to modify existing natural-gas turbines to run on hydrogen and is also providing services to capture carbon emissions from natural-gas power plants.

Ms. Chow noted that many asset managers, including Neuberger Berman, have made pledges to reduce the carbon footprint of their portfolios. She questioned how it is possible to own a company like GE, which could potentially help with decarbonization, when it would also significantly increase the carbon intensity of the portfolio.