If the offer is oversubscribed, GE shareholders who tender will exchange only a prorated portion of their tender. GE will retire approximately 671 million shares, reducing its float by 6.6%.
“We expect to complete the exchange offer next week and are pleased with the result of the pricing period and final exchange ratio. The result is good for GE shareholders as we expect to retire about 671 million shares and reduce our outstanding float by approximately 6.6% upon completion of the exchange offer,” said GE Capital Chairman and CEO Keith Sherin.
The completion of the exchange offer and separation of Synchrony Financial is consistent with GE’s stated strategy of focusing on its industrial core and reducing the size of its financial businesses. The separation reduces the systemic footprint of GE Capital and will allow Synchrony to operate as a stand-alone company and pursue a long-term strategy that is focused only on its own business objectives.
Barron’s reports one fund manager, The Prudent Speculator’s John Buckingham, will tender his shares for the premium, but sell quickly(and presumably buy back GE). This may be an attractive option in non-taxable accounts.
We like stand-alone GE but the sizable SYF premium is too rich to pass up: As of last night, the number of SYF shares to be received (with one more day to go in the three-day average) was 1.049. With SYF presently trading near $31.00, that works out to $32.50 or so of total value per GE share, or some $2.00 more than the $30.50 at which General Electric is currently trading…
While we are intrigued by Synchrony’s core business and solid private label credit card partnerships with the likes of Wal-Mart Stores (WMT) andAmazon.com (AMZN), our proprietary valuation engine does not currently view SYF shares as favorably as continued ownership of GE and other financials in our monitored universe of stocks. The less favorable relative valuation is due in part to the lack of dividend, which precludes ownership of the stock in the must-pay-a-dividend strategy that we implement for our managed account clients and proprietary mutual fund holders. This Dividend Value strategy is where we hold the majority of our GE shares.
To be sure, Synchrony suggests that it desires to pay a divided and we believe that it will have the cash flow necessary to offer a decent-sized payout sometime next year, but regulators must approve the issuance – “The Fed has a process that they measure all of the other banks on [for Comprehensive Capital Analysis and Review].”
Thus, we are very likely to sell the SYF shares we receive as soon as we get them.
Last week, we shared the opinion of William Blair’s Nick Heymann, who advised investors to pass on the offer. With few recommending taking Synchrony on its own merits, it is possible the stock will see downward pressure as premium-seekers exit. GE may also see an increase as people like Buckingham seek to reenter with the new smaller float.
Disclosure: The author holds shares of GE and does not plan to tender.