General Electric (GE) made the first move in its planned multistep divestment program with the sale of selected healthcare diagnostic and monitoring assets to Veritas Capital. Veritas will pay $1.05 billion for the enterprise financial management, ambulatory care management, and workforce management assets constituting GE Healthcare’s value-based care division. We plan no change to our fair value estimate or moat rating.
To simplify the firm and strengthen its balance sheet, GE plans to sell $20 billion of assets over the next few years. Assets held for sale, likely including the healthcare assets sold to Veritas, totaled $4.2 billion at year-end 2017. The $20 billion target does not include the 62.5% stake in Baker Hughes, for which GE is also actively considering divestment options.
We detect elements of opportunism from GE’s perspective when analyzing the sale. The buyer is a private equity firm rather than an established operator with potentially greater strategic interest in expanding its presence in the roughly $9 billion market for digital management of healthcare workflows. We also believe the value-based care division possesses economic moat potential based on intangible assets (proprietary software) and switching costs (products already integrated into IT systems of the established customer base) of precisely the type GE hopes to expand over time. GE Healthcare President Kieran Murphy stressed his unit will continue to “significantly invest” in core digital solutions including data analytics and other aspects of precision health delivery and management.
GE seeks to bolster its cash balance to address potential medium-term cash needs, including a working capital ramp-up in aviation, pension funding needs (including $6 billion in 2018), building reserves to meet long-term care insurance obligations ($15 billion over seven years), restructuring costs in power, renewables, and other segments, and potential settlements related to other legacy issues.
Morningstar Premium Members gain exclusive access to our full analyst reports, including fair value estimates, bull and bear breakdowns, and risk analyses. Not a Premium Member? Get this and other reports immediately when you try Morningstar Premium free for 14 days.
David Silver does not own shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.