General Electric

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The business for sale comprises several divisions, which include a commercial lending arm and automobile, office and construction machinery equipment leasing businesses. It is the second acquisition of a GE business by SMFG this year, the first being a European buyout-financing business. SMFG is the second largest financial group in Japan after Mitsubishi UFJ (TYO: 8306, initial buy ¥918.90). Both companies have been seeking to grow outside of Japan.

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Demand for GE Capital assets has been so strong that the parent is running well ahead of schedule in divesting the $200 billion or so of GE Capital financing assets it announced in April.

This is so GE can focus more on its industrial goods businesses such as jet engines and huge turbines where management feel the company has more of an edge. It will be dramatic transformation of the company and back in April the company was forecasting that the transactions would allow it to potentially distribute a whopping $90 billion plus to shareholders over the 2015 – 2018 period as highlighted in the following graphic:

In the wake of the GFC, being a big bank (and GE Capital was essentially one of the biggest in the United States) has got much tougher. As part of the move to exit GE Capital, management are working to lose its SIFI (systemically important financial institution) designation and therefore not face such tough regulatory oversight.

GE will also be hoping to benefit from an expansion in its price to earnings multiple, with industrials generally carrying much higher multiples than financials.

Earlier this year famed activist Nelson Peltz’s Trian Fund become a major shareholder in GE with a view that the market was underestimating what GE will be worth in its new guise. The shares have been re-rated upwards this year, appreciating more than 20% year to date.

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