By David Randall
NEW YORK (Reuters) – As General Electric completes its $191.9 billion spinoff, optimistic investors are betting it will defy the lackluster stock price performance that has followed many company splits in recent decades.
GE shares are up nearly 37% this year Monday and are near their highest level in seven years.
On Tuesday, the company’s energy spinoff – whose businesses include producing wind turbines and powering data centers – began trading under the name GE Vernova. GE Aerospace, which makes engines for commercial and military aircraft, retained the GE symbol. Investors who owned GE as of March 19 received one share of GE Vernova for every four shares of GE they owned.
Vernova shares rose about 3.8% on Tuesday, while GE shares rose 1.2%.
Although spinoffs are typically designed to unlock value, many have been followed by unremarkable stock performance. A Bain & Co study of more than 350 spin-offs between 2000 and 2020 showed that spin-offs generated an average total investor return – defined as stock appreciation plus dividend yield – of 5.1% per year during the three years following the split. This compares to an average annual total return of 8.7% for the S&P 500 during the same period.
“You don’t get multiple expansion for free in this type of deal, you have to earn it,” said Jeff Haxer, a partner at Bain who led the study.
The spin-offs underperformed over the three-year period for a wide range of reasons, including a loss of synergies that had helped the parent company control costs or maintain margins, Haxer said. The firm studied spinoffs that created companies with a market value of more than $1 billion, including Baxter’s spinoff of its Baxalta biopharmaceutical business and Kraft’s spinoff of its snacks business into Mondelez International .
It remains to be seen whether GE’s latest spin-off will meet a similar fate. GE announced in 2021 that it would split into three companies focused on aerospace, healthcare and energy, as part of CEO Larry Culp’s plan to unlock value and make capital allocation more transparent for investors.
Its healthcare business, GE HealthCare Technologies, was spun off in January 2023 and has so far bucked the broader trend. The company’s shares are up nearly 50% since its split, while shares of the parent company are up nearly 170%.
Some investors are betting that the company’s latest spinoff will enjoy similar success.
Jason Adams, portfolio manager of the T Rowe Price Global Industrials Fund, said GE’s aerospace business puts it at the forefront of global industrial companies.
GE Aerospace has been a cash cow for the Boston-based company, with some analysts estimating its market value at more than $100 billion after the split.
At the same time, the new GE Vernova could see growth due to the increasing consumption needs of data centers that will power generative artificial intelligence, Adams said.
“Aerospace was a better known entity and its growth prospects better understood, but I think Vernova was discovered more recently by the investment community and that was the impetus for the stock’s listing. (GE) this year,” said Adams, who plans to be a shareholder in both companies.
Vernova said last month it plans to make up a huge backlog in offshore wind equipment over the next two years, signaling improving market conditions for the beleaguered sector, which has faced heavy writedowns as the Soaring inflation, interest rate hikes and supply chain issues have increased project costs.
Larry Tentarelli, chief technical strategist at Blue Chip Daily Trend Report, said the rest of GE is now a better pure-play aviation company. He expects its multiples to improve from current 22 times earnings as investors gain a clearer picture of earnings and balance sheet growth, independent of GE’s electric business.
“The aviation industry is firing on all cylinders,” said Tentarelli, who owns GE and plans to hold on to his Vernova stock.
Whether the deal turns positive for investors will likely depend on the growth of GE Vernova’s renewables business, said Chris Snyder, an analyst at UBS. He has a buy rating on both companies, with a price target of $154 for GE and $37 for GE Vernova.
Among analysts covering GE, 13 now have a buy or strong buy and 5 have a hold, according to LSEG.
“GE is gaining share and has pricing power,” Snyder said, while growing energy demand due to AI data centers makes him “increasingly positive about GE Vernova’s prospects.” .
(Reporting by David Randall; additional reporting by Lewis Krauskopf; editing by Ira Iosebashvili and Nick Zieminski)
