General Electric is offering investors a deal: shares of a company it controls at a 7% discount. But investors might be better off skipping it.
GE investors are being notified of an offer to exchange their shares in the diversified manufacturing company for shares of Synchrony. Synchrony is already publicly traded under the symbol SYF, but GE owns an 84% stake in the largest provider of third-party credit cards in the country. GE is looking to further divest its holdings in financial assets and is allowing its investors to own more Synchrony. GE investors have a bit of an incentive since the deal, expected to end the week of Nov. 16, lets investors trade shares for Synchrony at 7% below the price.
Deciding whether the trade is worth it is a topic that will keep arbitrage traders busy. It is possible some speculators could accept the exchange, sell Synchrony shares and then buy back GE shares. But long-term GE investors, who hold their GE shares, might actually benefit by doing nothing, says Nicholas Heymann, analyst at William Blair. The exchange offer could reduce the float of GE stock by 6% to 7%. Holding GE stock generates more than a 3% dividend yield, and the company’s core business is looking strong, Heymann says. “This is a different company,” he says. “It’s not just a safe stock, but could return growth from 2017.”
Mr. Heymann has been quite busy, also speaking with TheStreet and suggesting that GE shareholders pass on the Synchrony exchange offer.
While a steep discount on Synchrony shares may sound like a bargain, the reduction in GE’s share base is a good reason to hold on to GE since the value of the remaining stock will be higher. Nick Heymann, an analyst with William Blair, estimates GE will get a boost of 8 to 9 cents of earnings per share by trimming the number of shares outstanding.
“GE likes to talk about returning capital to shareholders, but the trade will depend on whether you like Synchrony or GE’s prospects,” he said in a phone interview. “Our belief is that GE’s stock could potentially double by 2020.”
Probably not a surprising answer from William Blair’s “co-group head–global industrial infrastructure“. We suspect an analyst focusing on the financial services industry would have a different take. Another article on TheStreet warns that if GE stock rises too much, or Synchrony common stock falls too much, then the deal’s 7% premium will shrink, or even become negative.
Since GE began its mid-October offer to give investors $107.53 worth of Synchrony shares for every $100 of GE stock they turned in, GE’s shares have risen by as much as 2% while Synchrony’s have dropped as much as 2%.
The problem? GE has set a limit on the amount of Synchrony stock it’s willing to swap for each GE share, and if the spread between the two tightens too much, the stocks may reach that ceiling, eating into the discount.
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In order to trip the threshold that would begin to dissolve the discount, prices would need to further converge, with GE shares rising 12%, Synchrony dipping by 11%, or a combination of the two directions.
At least one analyst, our friend Mr. Heymann, does not like the arbitrage going on.
Speculators are already positioning themselves to profit off price gaps in the GE exchange ahead of the mid-November deadline, according to Nick Heymann, an analyst with William Blair.
“There’s all kinds of voodoo going on,” he said in a phone interview.
We agree with Mr. Heymann about GE’s strong prospects, but remain unconvinced that Synchrony Financial’s prospects coupled with the 7% premium, which we view as unlikely to be broken before the ratio is set on November 13, will not be a better option for shareholders. We suggest that shareholders, already familiar with GE’s industrial business, take some time to study Synchrony Financial’s business before making their choice. What do you think, dear readers, about this exchange offer? What do you plan to do with your shares?
Disclosure: The author owns shares of GE
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