General Electric’s shares continued to decline on Thursday, a day after the company announced plans to sell its jet leasing business to rival AerCap and include a substantially reduced GE Capital in its balance sheet.
GE shares fell more than 8% on Thursday’s noon trading session after falling about 5% on Wednesday. Prior to the announcement, shares had risen more than 120% in the past six months, reaching a new 52-week high this week.
The Boston-based conglomerate announced on Wednesday the deal to sell GE Capital Aviation Services, or Gecas, the largest remaining asset in the company’s colossal financial arm, GE Capital, to AerCap. GE said it will have a 46% stake in the combined company and the business will generate about $ 24 billion in cash. As soon as the deal closes in nine to 12 months, GE plans to transfer GE Capital’s remaining debts and assets to the company’s industrial balance sheet.
Even with the fall of GE shares, AerCap investors seem to like the deal. Shares in the Irish-based company rose more than 6% in Thursday’s midday trading session.
In an interview with CNBC on Wednesday, GE CEO Larry Culp argued that the deal is a critical step in his company’s recovery plan as it seeks to simplify operations and pay off debt.
“GE shareholders should be delighted with this transaction,” Culp told CNBC’s David Faber. “With a $ 30 billion headline, what we can do here is bring in money … which will allow us to apply it to further reduce debt.”
But not everyone is sold. JPMorgan analyst Steve Tusa, who gained many followers for his early warning signs of GE’s fall under former CEO Jeff Immelt, alerted investors early Thursday morning about GE’s debt problems. He said GE’s leverage will increase to about seven times its assets after consolidating GE Capital’s remaining debt on its balance sheet.
He urged investors to focus less on the company’s improvements in free cash flow and instead to focus on “changing net debt combined with EBITDA”.
The stock benefited from investor optimism about the pandemic and the possibility of a rapid economic recovery. But those gains are already quoted in GE’s shares, he told investors.
The company said it will have paid about $ 70 billion in debt since the end of 2018, once the deal with AerCap is closed. The company has “high sustainable leverage … in addition to the fundamentals that we would characterize as mixed with expectations of future earnings that remain very high,” he said.
Tusa reiterated his company’s $ 5 target price.
Asked on Thursday about Tusa’s note, GE board member Ed Garden said that GE’s industrial balance sheet is not only receiving GE Capital’s remaining debts, but “we are also receiving $ 21 billion in assets . It is a compatible book “.
“But most importantly, what we did here was to reduce the risk and reduce the leverage. It is all part of our plan to make this industrial company focused, simpler and more pure with leverage in line with its peers,” said Garden in ” Squawk on the Street “, adding that the goal is to reduce leverage to 2.5 times your assets.
Garden is the founder and chief investment officer of Trian Partners, which originally acquired a $ 2.5 billion stake in GE in 2015. He told CNBC on Thursday that the hedge fund had sold part of its stake in GE to finance new positions at Comcast. He added that while GE “was not what we expected” when Trian invested, he is “very proud of where GE is going”.
Disclosure: Comcast owns NBCUniversal, the parent company of CNBC.