Shares of General Electric continued to fall on Thursday, a day after the company announced plans to sell its jet rental business to its company AerCap and include a substantially reduced GE Capital in its balance sheet.
Shares of GE fell more than 8% on Thursday in trading, after falling about 5% on Wednesday. Prior to the announcement, shares had rallied more than 120% in the past six months, reaching a new high of 52 weeks as recently as this week.
The Boston-based conglomerate on Wednesday announced an agreement to sell GE Capital Aviation Services, or Gecas, the largest remaining asset in GE Capital’s previously colossal financial sector to AerCap. GE said it will take a 46% stake in the combined company and that the deal will generate about $ 24 billion in cash. Once the deal is closed within nine to twelve months, GE plans to shift GE Capital’s debt and remaining assets to the company’s industrial balance sheet.
Even though GE shares are falling, AerCap investors seem to like the deal. Shares of the Ireland-based company rose more than 6% on Thursday in trading.
In an interview with CNBC on Wednesday, GE CEO Larry Culp said the deal is a critical step in his replacement plan for the company, 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 title, what we can do here is bring cash … which will allow us to allocate it to an additional debt reduction.”
But not everyone has sold out. JPMorgan analyst Steve Tusa, who gained strong follow-up for his early warning signs of GE’s downfall under former CEO Jeff Immelt, warned investors Thursday morning of impending debt problems and GE. He said GE’s leverage will increase its assets up to about seven times 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 “net debt change combined with EBITDA”.
The shares have benefited from investor optimism about the pandemic and the possibility of a rapid economic recovery. But those gains already have a price on GE shares, he told investors.
The company said it will have disbursed about $ 70 billion in debt by the end of 2018 once the agreement with AerCap is closed. The company has “highly sustainable leverage … in addition to the fundamentals that we would characterize as mixed with expectations about future earnings that remain too high,” he said.
Tusa reiterated his company’s $ 5 goal to the company.
Asked Thursday about Tusa’s note, GE board member Ed Garden said GE’s industrial balance sheet not only gets GE Capital’s remaining debt, but “we also get $ 21 billion in assets. It’s a coincidental book. “
“But the most important thing is that what we have done here is to take risks and deleverage. Everything is part of our plan to turn it into a focused, simpler and purer industrial company, with leverage in line with its peers,” he said. dir Garden. to “Squawk on the Street,” adding that the goal is to reduce leverage by up to 2.5 times its assets.
Garden is the founder and chief investment officer of Trian Partners, which originally acquired $ 2.5 billion from GE in 2015. He told CNBC Thursday that the hedge fund has sold part of its stake in GE to fund new positions at Comcast . He added that while GE “wasn’t what we expected” when Trian invested, he’s “very proud of where GE is headed.”
Disclosure: Comcast is the owner of NBCUniversal, CNBC’s parent company.