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Morningstar | GE Confidentially Files for IPO of Healthcare Unit

Narrow-moat-rated General Electric made some news as Bloomberg reported late on Dec. 18 that the conglomerate confidentially filed for an initial public offering of its healthcare unit. A GE spokesperson declined to comment on the report, saying only, "As we announced in June, GE intends to separate its healthcare business, but we have not confirmed the form or timing," according to CNBC. Indeed, the form and timing have been the subject of much speculation and debate. We’ve speculated that GE may still try to sell a portion of its life science business after rumors that it rejected interest from Danaher earlier this year. The life science business could yield about a $20 billion enterprise value. New CEO Larry Culp also left the door open to selling a bigger piece of the healthcare business. For now, we are not making any changes to our $13.70 fair value estimate.

The public filing will probably be next spring, according to Bloomberg, potentially accelerating the timing of the healthcare separation by months from what we speculated. Private filings tend to cut down the time needed to IPO, but some of these considerations are offset by GE Healthcare’s size, which would rank as one of the world’s largest for a public healthcare company. We had already previously deleted all healthcare-related cash flows from 2020 onward in our model. We agree with news reports that see an enterprise value ranging from $65 billion to $70 billion based on comparable companies. We peg ours at the midpoint of the range, given the forward enterprise value/EBITDA multiple for peer Siemens’ Healthineers business, which was spun off in March (among other comps). Based on GE’s public statements in June, the company will assume about $27 billion in debt. About $18 billion of this debt will be related to borrowings and about $9 billion will be related to pensions, implying that GE Healthcare will have an equity valuation of about $40 billion.

Why the confidential filing? Opting to file confidentially gives GE the flexibility to spin off the healthcare business when the odds are most in its favor. A public filing often leads to multiple exchanges with regulators in full public view, which can prompt additional questions. These exchanges with regulators and advisors are routine but would add to the mountain of scrutiny the company already faces.

We continue to support the separation of GE Healthcare, and we like that Culp is continuing former CEO John Flannery’s broad strategic plan. While the wide-moat healthcare unit is GE’s second-best business, in our view, it bears little relation to GE’s core industrial infrastructure business. That said, there are downsides to the deal. GE Healthcare generates high amounts of free cash and is less affected by market cycles. GE Power and GE Aviation, by contrast, are long-cycle businesses. Selling an aerospace engine during its ramp burns significant amounts of cash in order to generate large amounts of cash in aftermarket service revenue. Moreover, we are less concerned about earnings quality in the healthcare business. Contract assets--the difference between cash received and booked revenue--are minimal in the healthcare business, in contrast to the power business, for example.

Even so, we view GE Healthcare as an important catalyst in the stock and a critical pivot in the firm’s new strategic direction. We also believe it is the most important piece from a financial standpoint to deleverage GE’s balance sheet. Finally, we anticipate "remainco GE" will monetize its remaining 20% interest in GE Healthcare. Combined with the $27 billion that should be removed from remainco GE’s balance sheet, selling its approximate 20% interest in GE Healthcare could raise an additional $8 billion for the firm.