Nelson Peltz's Trian Trims Its GE Stake. Can You Blame It?

(Bloomberg Opinion) — The aerospace sector is headed for “a slow, multi-year recovery,” General Electric Co. Chief Executive Officer Larry Culp warned on last month’s second-quarter earnings call. There’s nothing unique about that view: Boeing Co. has said it will take about three years for air-travel demand to recover to 2019 levels; Raytheon Technologies Corp. is targeting 2023; and the International Air Transport Association recently pushed back its timeline for a recovery to 2024.

The slump is particularly painful for GE, though. Unlike many of its rivals in the market for airplane production, it was already in the middle of a multi-year turnaround before the pandemic hit. The news that influential shareholder Trian Fund Management  — led by Nelson Peltz — is trimming its position in the industrial giant should be viewed in that context.

Trian cut its stake in GE by 46% during the last week to just over 32 million shares, according to regulatory filings. The sale was for “portfolio management purposes, including to provide for new positions,” Trian said in an emailed statement. Even with the divestiture, the fund remains relatively high up on GE’s shareholder register and chief investment officer Ed Garden will continue to serve on GE’s board. So Trian is hardly abandoning the investment, nor has it given up hope of a recovery. “Trian is highly supportive of GE CEO Larry Culp and his team’s restructuring efforts and focus on creating long term value,” the fund said. Still, it’s a tough time to be selling.

GE shares are down more than 40% this year, compared with a nearly 4% gain for the S&P 500 Index. Trian’s average price for the sales was just over $6, a nearly 75% discount to the mid-$20 range where GE was trading during the month leading up to the fund’s October 2015 announcement of its investment.

Back then, Trian argued the market wasn’t appreciating the “bold steps” that former CEO Jeff Immelt had taken to reshape the company and touted the “defensive growth” profile. By improving operating margins and adding $20 billion of debt to help fund share buybacks, the stock could trade for $40 to $45, Trian argued. It never came close.

GE has since been bogged down by tens of billions in writedowns, with the brunt tied to a steep funding shortfall in its long-term care insurance business and an ill-timed acquisition of Alstom SA’s power business that increased the company’s position in the gas turbine market just as demand began to rapidly deteriorate. Immelt’s replacement, John Flannery, was pushed out and Culp took his place in late 2018. Buybacks are out of the question, with the company having instead spent the past few years doing everything it can to reduce a debt load that became untenable as the power business burned through cash.

Culp was just starting to show progress on a turnaround of the embattled power unit when the pandemic arrived, with the high-margin and cash-flow generating pharmaceutical diagnostics and aviation units getting crushed the hardest. The company has recorded a cash outflow of more than $4 billion so far in 2020 and Culp was hesitant to give a firm commitment to a positive number for the second half of the year, which is typically when GE makes most of its money. 

Will GE survive the crisis? Yes, and it’s to Culp’s credit that’s the case. He has aggressively cut costs, accelerated asset sales and generally done a much better job fixing this massive enterprise than critics like myself thought was possible when he started. But what will the company look like on the other side of this?

Siemens Healthineers AG’s announcement of a $16 billion purchase of cancer radiotherapy company Varian Medical Systems Inc. earlier this week speaks to the risk of missed opportunities. The Varian deal is pricey and risky with hospitals cutting their budgets to adapt to the pandemic. But the combination of Siemens Healthineers’ diagnostics expertise and Varian’s treatment technology is strategically intriguing over the long haul and the takeover could end up being opportunistic. In a different world, this deal might have been GE’s to lose. After all, the CEO of Varian is a former GE Healthcare executive. As it is, the company is effectively side-lined from any kind of major M&A for the foreseeable future.