Shares of General Electric continued to fall on Thursday, a day after the company announced plans to sell its jet lease business to AerCap and include a significantly slimmed-down GE Capital in its balance sheet.
GE shares fell more than 8% during Thursday afternoon trading after falling about 5% on Wednesday. Before the announcement, stocks had rallied more than 120% in the past six months, hitting a new 52-week high as recently as this week.
The Boston-based conglomerate announced the deal on Wednesday to sell GE Capital Aviation Services, or Gecas, the largest remaining asset of the once-colossal financial arm GE Capital, to AerCap. GE said it will take a 46% stake in the combined company and the deal will generate approximately $ 24 billion in cash. Once the deal is completed in nine to 12 months, GE plans to transfer GE Capital’s remaining debt and assets to the company’s industrial balance sheet.
Even if GE’s stock goes down, AerCap investors seem to like the deal. Shares of the Ireland-based company were up more than 6% during Thursday afternoon trading.
In an interview with CNBC on Wednesday, GE CEO Larry Culp claimed the deal is a critical step in his turnaround plan for the company as he aims to simplify operations and pay off debt.
“GE shareholders should be pleased with this transaction,” Culp told CNBC’s David Faber. “With a headline of $ 30 billion, we can bring in cash here … so we can spend that on additional debt reduction.”
But not everyone is sold. JPMorgan analyst Steve Tusa, who earned a strong following for his early warning signs of GE’s fall under former CEO Jeff Immelt, warned investors Thursday morning of impending debt problems for GE. 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 free cash flow improvements and instead focus on “change in 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 priced in GE’s stock, he told investors.
The company said it has paid off about $ 70 billion in debt since late 2018 once the deal with AerCap is closed. The company has “sustainably high leverage … on top of the fundamentals we would describe as mixed with expectations about future earnings remaining too high,” he said.
Tusa reiterated his firm’s $ 5 pricing target for the company.
When asked about Tusa’s note, GE board member Ed Garden said that not only does GE’s industrial balance sheet get the remaining debt from GE Capital, but “we’re also getting $ 21 billion in assets. It’s an equal book.”
“But most importantly, what we’ve done here is to reduce risk and reduce leverage. It’s all part of our plan to make this a focused, simpler and purely industrial company with leverage in line with its colleagues, “said Garden. on “Squawk on the Street,” adding that the goal is to reduce leverage 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 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 is “very proud of where GE is going.”
Disclosure: Comcast is the owner of NBCUniversal, CNBC’s parent company.