Shares of General Electric continued to drop Thursday, a day after the company announced plans to sell its jet-leasing business to rival AerCap and fold a substantially slimmed down GE Capital into its balance sheet.
GE stock was down more than 8% in midday trading Thursday after tumbling about 5% on Wednesday. Before the announcement, shares had rallied more than 120% in the past six months, hitting a fresh 52-week high as recently as this week.
The Boston-based conglomerate on Wednesday announced the deal to sell GE Capital Aviation Services, or Gecas, the largest remaining asset of the company’s once-colossal finance arm GE Capital, to AerCap. GE said it will take a 46% stake in the combined company and the deal will generate about $24 billion in cash. Once the deal closes in nine to 12 months, GE plans to shift GE Capital’s remaining debt and assets onto the company’s industrial balance sheet.
Even as GE stock falls, AerCap investors appear to like the deal. Shares of the Ireland-based company were up more than 6% in midday trading Thursday.
In an interview with CNBC on Wednesday, GE CEO Larry Culp made the case that the deal is a critical step in his turnaround plan for the company as he seeks to simplify operations and pay down debt.
“GE shareholders should be delighted with this transaction,” Culp told CNBC’s David Faber. “With a $30 billion headline, what we’re able to do here is bring cash in … which will allow us to put that toward additional debt reduction.”
But not everyone’s sold. JPMorgan analyst Steve Tusa, who earned a strong following for his early warning signs on the fall of GE under former CEO Jeff Immelt, warned investors Thursday morning of looming debt problems for GE. He said GE’s leverage will increase to about seven times its assets after it consolidates GE Capital’s remaining debt onto its balance sheet.
He urged investors to focus less on the company’s improvements in free cash flow and instead focus on “change in net debt combined with EBITDA.”
The stock has benefited from investor optimism over the pandemic and the possibility of a swift economic recovery. But those gains are already priced into GE’s stock, he told investors.
The company said it will have paid down about $70 billion in debt since the end of 2018 once the deal with AerCap closes. The company has “sustainably high leverage … on top of fundamentals we would characterize as mixed with expectations on future earnings that remain too high,” he said.
Tusa reiterated his firm’s $5 price target on the company.
Asked Thursday about Tusa’s note, GE board member Ed Garden said GE’s industrial balance sheet isn’t just getting GE Capital’s remaining debt, but “we’re also getting $21 billion of assets. It’s a matched book.”
“But most importantly, what we’ve done here is de-risk and de-lever. It’s all part of our plan to make this a focused, simpler, pure-play industrial company with leverage in line with its peers,” Garden said on “Squawk on the Street,” adding that the goal is to bring leverage down to 2.5 times its assets.
Garden is founder and chief investment officer at Trian Partners, which originally took a $2.5 billion stake in GE in 2015. He told CNBC on Thursday that the hedge fund has sold off some of its stake in GE to fund new positions in Comcast. He added that while GE “was not what we expected” when Trian invested, he’s “very proud of where GE is heading.”
Disclosure: Comcast is the owner of NBCUniversal, parent company of CNBC.