GE splitting its businesses 'may ring the bell for the conglomerate': Analyst

William Blair & Company Co-Head Nicholas Heymann, a longtime analyst of GE, explains what the latest restructuring means for the company and companies like it.

Video transcript

BRIAN SOZZI: First, let's start with that GE news. The industrial icon said today it will split up into three publicly traded companies. The first spinoff of GE Health Care will happen in 2023, followed by the other divisions in 2024. Nicholas Heymann covers GE at William Blair and joins us now. Nicholas, good to see you here. Pretty big news from GE. What's your take on it?

NICHOLAS HEYMANN: Well, I think it really highlights that GE's back. This company, all businesses now are line of sight to fire on all cylinders. This is important for aviation. Secondly, I think it also now may ring the bell for the conglomerate. We need to be more focused to not only unlock value, but to, in a digital economy, move more quickly and adeptly, to be able to capitalize on change. And so, GE's businesses are set up to do that and under Larry. And so, I think that's a key part of what's behind today's announcement.

JULIE HYMAN: Hey, Nick. It's Julie here. It's great to see you. And obviously, you've been covering this company for a long time. GE has suffered from an overly complex structure, I think it's safe to say, for a long time. With this split, does it-- obviously, it goes some way towards reducing that complexity. But for example, core GE is still going to own almost 20% of the health care business. And there's still a lot that we don't know. Is this really going to be-- I don't know-- a simple enough structure here that it's going to unlock the full value?

NICHOLAS HEYMANN: Yeah, Julie, your question is really, really spot on, because, you know, we are all theoretically waiting now just to have one set of financials. And that would have come about once they sold GECAS and really eliminated and shut down GE Capital at year end. I think the 2019 0.9% stake that will be held by aviation in the health care business, quite honestly, will be used to fund GE's portion of the RISE engine, the next generation engine they will develop with Safran for Airbus's new carbon-free aircraft come the middle of next decade.

So that is something that will be liquidated and used as needed, just like they're going to sell down their Baker Hughes, just like they'll sell down eventually their AerCap. And those two funds will be used to bring that net leverage down below $35 billion by early '23, or less than 2.5 times. So all these companies have line of sight to where they're going next. Most of them, except for aviation, have developed their new products. And, you know, it's time to leverage change to help accelerate GE's business's growth, as opposed to just crawl out from underneath the leverage and the challenges of the past.

EMILY MCCORMICK: Nicholas, this is Emily. I want to go back to that topic that you were mentioning about how this calls into question the conglomerate model here. And I'm wondering if there are other companies with a sort of similar structure that may now see the floodgate opened to actually have a similar sort of breakup.

NICHOLAS HEYMANN: I think, again, question's totally spot on. You have to wonder about 3M. You have to wonder about Honeywell. Any large diversified entity today, you know, 20, 30, 40 years ago, you could argue shared technology, you could argue mitigated the variability in one of the business's risk. You can go out and replicate that in two seconds for no cost frictionlessly today with ETFs.

So the diversification argument as a vehicle for investing in a conglomerate is no longer valid. Instead, in a digital economy, change is happening so fast that if you're encumbered by other businesses that are not exactly focused on the same customers and markets, you move slower.

BRIAN SOZZI: Nick, staying on the industrials, I mean, at some point, obviously, these businesses will be three separate entities traded out there by themselves. Why doesn't Berkshire Hathaway come out and buy one of these?

NICHOLAS HEYMANN: You know, you never know. That's always a possibility. The first one to be spun in 12 to 15 months will be health care. That's early '23 and-- sorry, in early '23. You should have the business that has the best opportunity for upward revision based on its strong profitability and a better than average growth, and, you know, I think that that, in turn, falling by now.

Power is all about capitalizing on this shift to renewable and green hydrogen energy. And they don't have any lost or stranded assets. They're at the lead in the conversion for the gas turbine business to run on 100% hydrogen. And clearly, they're at a very strong position in their home court to win with offshore, which is going to be a 15%, 20% growth business worldwide. And in the US, offshore should be a 20%, 25% growth business this decade.

JULIE HYMAN: Hey, Nick, Julie again. Just in 20 seconds, what does this mean for you and your coverage of this company? Are you still going to cover all three parts, or do you have to pick one?

NICHOLAS HEYMANN: Good question, and, you know, we've kind of covered everything underneath the sun in the industrial space over the years, except for defense and of companies, in particular. So, you know, we'll see. You know, certainly, aviation and aerospace is something we've done for a long time, as well as power. You know, health care, we've done, you know, whether it's through Siemens and GE or others. But, you know, it does-- you know, it does break this up into smaller bite-sized pieces, kind of like UTC did when they broke up.

BRIAN SOZZI: Nicholas, as a former analyst--

NICHOLAS HEYMANN: [INAUDIBLE]

BRIAN SOZZI: To me, Nicholas, this sounds like you're going to have to be writing a lot more notes and covering a lot more earnings. We'll leave it there. Nicholas Heymann, who covers GE at William Blair, thanks for hopping on. I know it's a busy morning.