During the last years, General Electric (NYSE:GE) divested assets at a brisk pace in an effort to streamline the business, exit less desirable lines of business and shore up its struggling balance sheet.
The GE Power unit has been a key target of this restructuring effort, after the segment’s revenues and profits fell a few years ago. GE has made substantial progress in streamlining its electrical business in recent years, resulting in improved performance. However, the company may be about to announce another big move: the sale of its nuclear turbine business.
Power unit remodel
General Electric’s power business generated operating income of $5.1 billion on revenue of $36.8 billion in 2016, adjusted for a subsequent change in the way GE has defined its business segments. Just two years later, revenue had dropped to $27.3 billion and the unit posted a loss of $808 million.
That brutal collapse — combined with GE’s growing pension deficit and massive losses in the company’s insurance operations — forced the company to rethink its energy business from the ground up.
The core of GE Power is building and servicing gas turbines. This part of the activity presents strong synergies with the aeronautical activity of the industrial conglomerate. Moreover, he is already recovering his health. Earlier this year, management estimated that the gas-fired power business will generate a high single-digit operating margin in 2021, with improved free cash flow.
The rest of the power segment has less to offer for GE. As a result, the company is reducing its activities there. At the end of 2017, he agreed to sell his industrial solutions business (which manufactured equipment for electrical utilities) to ABB for $2.6 billion. Less than a year later, it struck a $3.25 billion deal to sell its distributed power business to Advent International, a private equity firm.
Finally, last September, GE announced it would “exit the new coal-fired power market” as it shifts its business toward low-carbon technologies. It expects to complete most of its existing new construction coal projects by the end of next year.
Another transaction under consideration
Gas power generated $12.7 billion of GE Power’s $17.6 billion in revenue last year. GE’s steam power business accounted for most of the rest – $3.7 billion. This included nearly $1.4 billion from the new coal-fired construction business that GE is winding down, about $300 million from new steam turbines for nuclear power plants, and about $2 billion from services for existing coal and nuclear power plants.
Earlier this year, General Electric forecast revenue from new nuclear turbines to rebound to $900 million by 2023, while service revenue would remain roughly flat. But now GE is considering selling its nuclear turbine business to French utility giant EDF for $1.2 billion.
GE’s interest in such a deal should come as no surprise. In early 2020, Bloomberg reported that the company wanted to sell the entire steam plant. With GE already exiting new-build coal-fired plants, selling the nuclear turbine business would essentially achieve this goal, reducing the steam power business to consist solely of services for traditional customers, particularly in coal power.
A smart move
Years of restructuring efforts are paying off for GE’s gas-fired power business, which is on track to post a high-single-digit segment margin this year. Management believes there is scope to further improve the margin over the next few years and convert more than 90% of free cash flow.
By contrast, the rest of GE Power — including the steam power generation business — appears to be losing money and burning money. GE could probably bring the steam plant back to profitability within a few years, but that’s an unnecessary distraction. With only $3 billion in revenue projected in 2023 (including services and new nuclear turbines), low margins and minimal long-term growth potential, the steam plant represents an excessive distraction from its value.
If GE can sell its nuclear turbine business, the company would receive a small injection of cash to help it continue to reduce its debt. Meanwhile, it would offload a turnaround project with modest upside potential, allowing management to focus more on GE’s key long-term growth drivers. It seems obvious.
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