Choosing the Best Exit For Premium Rewards: GE Insurance Disposal Boosts the Choice of a Carve-Out

With the highly cyclical IPO market warming up again, big companies are refocusing on the equity carve-out as a preferred route for strategic disengagements from large businesses. Chancey and protracted as it is, a public offering tempts some managements because the lines being divested are so big that selling to investors may produce better returns than dealing with strategic or financial buyers in the current m&a market. The warning is that once begun, the IPO process may not make it to the finish line and the disposal may be diverted to another mode. Take the experiences of two of the nation’s biggest companies that are parting with large business units. Chemical giant Du Pont Co. had planned to cut loose its beleaguered synthetic fibers business through an IPO, only to wind up with an agreement in November to sell the unit – INVISTA – to privately owned Koch Industries Inc. for $4.4 billion. But General Electric Co. kept the IPO front hopping by unveiling plans to package the life and mortgage insurance operations of its General Electric Capital business and sell it off via a public offering to be filed in early January. At first glance, experts say, GE has a better chance of getting its deal to market. The likelihood of divergent outcomes underscores the myriad influences that go into finishing a carve-out, beginning with the business unit’s appeal to public investors and covering a range of goals and developments unique to the individual company. Du Pont’s initial decision to go down the IPO path with INVISTA was seen by many as logical when it was reached. The business has been in trouble because of softness in its primary customer bases – apparel and carpet manufacturers – and has been less rewarding to Du Pont as competitors eroded its technical advantage. There were concerns that a buyer willing to pay a decent price could not be found, and some observers even said that a lean-and-mean independent could be a formidable competitor. But Du Pont had more ambitious plans that needed funding from a swift redeployment, including a shake-up pegged to emphasizing its fastest growing businesses, cutting costs, and shifting more operations abroad. And a deep-pocketed buyer did show up in the form of Koch, which seized an opportunity to bulk up its own fibers business and, as a private company, was in a good position to brave the market’s inevitable cyclicality. Although GE is in a restructuring that shares some characteristics with Du Pont’s – an emphasis on faster-growing businesses, a redeployment of capital – GE is in a better position to wait out the IPO process and its insurance business may pack greater clout with investors. Insurance expert John Nigh of Tillinghast-Towers Perrin points out for openers that the business GE is shedding will be among the insurance industry’s 10 largest, based on a reported book value of $10 billion. If a 30% slice of the proposed Genworth Financial Inc. is sold initially in the IPO, as planned, GE would raise $3 billion that it can pour into other parts of the business. In announcing the carve-out, CEO Jeffrey Immelt said that the company did not have the capital to finance the insurance operations and targeted “growth initiatives” at the same time. GE is to shed the remaining majority stake over the next few years. “The obvious conclusion you can draw is that GE chose not to deploy more capital into the insurance business,” Nigh says. “On the contrary, they will try to get capital out of it.” Nigh adds that an independent Genworth probably will fare better in a market that is both maturing and consolidating because it will have the currency to pursue acquisitions. But the principal reason why the IPO trumps a divestiture, he notes, is that Genworth actually houses a “disparate” group of businesses that make it tough to peddle to one buyer in a one-off sale. Genworth ranks first in sales of long-term care policies and stakes in annuities, variable insurance products, and term insurance, among other lines. “They are disparate and the appeal to one buyer is unlikely,” Nigh states. “There is good reason why it’s more logical to do an IPO than to sell this multidimensional group of companies with many different products outright.” As an independent, Genworth would be in a position to play both sides of the consolidation street, Nigh says, by using its stock for acquisitions to augment core businesses and divest smaller and non-core lines. “I expect to see both happening,” he says.