(Updated at 5 p.m. ET)
General Electric Co. will spin off its profitable healthcare business as the massive conglomerate aims to improve its financial standing by getting smaller.
As GE lost its spot on the Dow Jones Industrial Average Tuesday, the industrial behemoth unveiled plans to drop its healthcare unit to refocus on power, aviation and renewable energy. Those three segments made up more than half of GE's $122 billion in revenue last year.
GE will sell 20% of its healthcare business immediately and the rest will follow over the next 12 to 18 months. It will also divest its interests in oil-services company Baker Hughes and reduce its debt by $25 billion as it continues to hack away at corporate costs.
"Today marks an important milestone in GE's history," CEO John Flannery said in prepared remarks. "We are aggressively driving forward as an aviation, power and renewable energy company—three highly complementary businesses poised for future growth. We will continue to improve our operations and balance sheet as we make GE simpler and stronger."
GE's healthcare segment has been a bright spot among the conglomerate's vast portfolio. In 2017, GE's healthcare business posted $3.45 billion in profit on $19.12 billion in revenue, up 9% from $3.16 billion in profit on $18.29 billion in revenue in 2016. Across the entire company, GE reported a net loss attributable to shareholders of $6.22 billion, driven by significant declines in its power and renewable energy segments.
Healthcare has been one of GE's healthier businesses even though its success has been diluted by the company's struggles, said Pete Allen, who leads Vizient's sourcing and contracting operations.
"If it can be successfully extracted out of GE, the growth they have seen and the ability to reinvest in the business gives me some optimism that it will be a thriving business and innovate like our providers need it to," said Allen, adding that Vizient's members have about $2 billion of business with GE. "This is an area where a lot of companies are interested in—the data aggregation play and being able to turn that into decision-making tools for health systems."
The company has an array of healthcare assets that may attract potential buyers, particularly in the industry's mad dash to corral and make sense of reams of data.
GE is primarily known for medical devices, which many equipment manufacturers are using as a means to form consulting partnerships with providers. They aim to integrate the massive data sets with electronic health records and apps to give providers more visibility into patients' health metrics and behavior, as well as capital expenditures.
Its data management software and consulting services have helped providers like Baptist Health in northeast Florida, for instance, keep track of how long equipment lasted and how much it costs to maintain.
GE has been expanding its network of command centers that gather real-time data to help health systems streamline the flow of patients, reduce wait times, balance staff workload and improve other processes aimed at standardizing clinical practices. These types of solutions require significant investment but actionable analysis of those metrics can offer significant financial returns.
"With the command center idea, anything to prove out value-based care is huge," said Brad Haller, a managing director at consulting firm West Monroe Partners.
But it is unclear if GE's spinoff plans will disrupt the operations of providers using its products. Competitors may look to swoop in and capitalize on the uncertainty surrounding the transition, Haller said.
GE already planned to sell its information technology business to private equity firm Veritas Capital for $1.05 billion, including its financial management, ambulatory care and workforce management software.
As a stand-alone business, the new company may focus its research and development on medical supplies for the burgeoning genomics field, Haller said.
"This area in particular has seen a lot of private equity investment in the last 12 months and sincere innovation could allow them to be a key supplier," he said. "This is about how you can take a name like GE and re-pivot them for the future."
The spin off could give more freedom and control to new owners that don't have to navigate multiple management layers to get an idea approved, Haller added.
While the healthcare spinoff will narrow GE's portfolio and limit earnings and cash flow, the deal isn't expected to hurt it's A credit rating—if the company uses the proceeds to reduce its debt and leverage, according to Fitch Ratings. The reduction in debt and pension liabilities will mitigate those negative effects on the company's credit profile, the ratings agency said.
GE also plans to shed its majority ownership of oil-services company Baker Hughes, which could help lower GE's debt.
The company's aviation, power and renewable energy businesses share similar technology—in contrast to its outlier GE Healthcare segment—which could accelerate its cost-cutting strategy, Fitch said.
Yet, Fitch offered a negative credit outlook given the pricing pressure in renewable energy and volatile nature of oil and gas prices, loss of earnings related to its business sales, the uncertainty of its restructuring, and remaining large pension obligations even after the healthcare spin off.
It will be difficult to continue to optimize and grow the healthcare business when it is being carved out, especially as top IT talent leaves the company, said Keith Campbell, a director at West Monroe Partners.
But new owners will have an opportunity to expand their partnerships, he said.
"There is the new threat of Amazon, JPMorgan Chase and Berkshire Hathaway—they can strike deals like that within the medical supply chain," said Campbell, adding that vertically integrated companies and/or large health systems may want to diversify their revenue streams. "It sharpens their focus in terms of technology advancements and strategic relationships."
