NEW YORK (The Deal) -- General Electric
on Friday said it was selling most of the real estate and financial services assets of GE Capital for $23 billion to Blackstone
and Wells Fargo
in a move that is expected to substantially reduce the industrial conglomerate's regulatory headache in Washington.
As part of the deal the company will sell a large mortgage commercial real estate loan portfolio in the U.S. U.K. and Canada, valued at $9 billion, to Wells Fargo. In addition, two different Blackstone units will pick up a variety of office properties in the U.S. for $3.3 billion and commercial office logistics and retail assets largely in the U.K, France and Spain for €1.9 billion ($2.0 billion). In addition, Blackstone's real estate debt fund has agreed to buy mortgage loans in Mexico and Australia for $4.2 billion and its REIT has agreed to pay $4.6 billion to buy the unit's mortgage loan portfolio in the U.S., with Wells Fargo providing the financing.
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According to a release, the initial closings will take place in the second quarter of 2015.
GE CEO Jeff Immelt told participants on a conference call that the board has authorized the company to buy back up to $50 billion of shares at the same time that there is potential to return up to $90 billion to shareholders over the next few years through dividends and buybacks. The move comes after investors have grumbled about a stock price that has remained below $30 a share since the 2008 financial crisis. More than 90% of GE will be made up of industrial assets by 2018 after the deals are closed, and Immelt said he doesn't expect to issue any new GE Capital debt for at least five years.
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"This will create substantial shareowner value," Immelt said. "This is an excellent time to sell assets. We have about half of our 2015 goals for asset sales already achieved."
A key reason for GE to make the move is likely to be that the divestiture of those assets will allow General Electric to have its GE Capital unit de-register from a "Systemically Important Financial Institution" categorization imposed upon it by a council of regulators.
The GE Capital division was designated as "systemically important" in 2013 by council of regulators set up to identify emerging threats to the economy. The group of regulators, known as the Financial Stability Oversight Council, argued that the big interconnected unit would have a hard time selling assets in a period of financial stress and that it could cause an "impairment" of financial market functioning that would be "sufficiently severe to inflict significant damage to the broader economy."
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Immelt said the move will eliminate a "large wholesale-funded nonbank SIFI" and that the deals are a positive from a "regulatory" point of view. "We're working with regulators on SIFI de-designation. This is exactly what was envisioned by the FSOC process."
According to a GE statement, the company has discussed this plan, aspects of which are subject to regulatory review and approval, with its regulators and the FSOC staff and it plans to work closely with regulators to "take actions" necessary to de-designate GE Capital as a SIFI. "We have a constructive relationship with our regulators and will continue to work with them as we go through this process," Immelt said.
Being able to de-register will mean that GE Capital will in the coming years no longer be subject to time-consuming and costly Federal Reserve Board-run stress tests to see if it can survive a future financial crisis or living wills to explain how it would dismantle itself if it collapsed. It also would free GE from central bank-made capital buffer obligations and liquidity rules.
Another GE official noted that the timing for the sale is right, partly because regulators published guidance for how to escape designation as a SIFI in February. He added that recent congressional hearings have also given the company additional input about regulatory thinking on the subject and that the institution hopes to be in a position to apply to FSOC for de-registration from its SIFI designation by 2016.
A Treasury spokeswoman said the council welcomes any plans that "address the potential risks to financial stability" and that it has a process to evaluate changes at a designated company to consider whether to rescind the categorization. She added that the council annually reevaluates all the designated financial companies and during that review process the company is invited to meet with staff to present relevant information.
Donald Lamson, partner at Shearman & Sterling in Washington, noted that he agrees that 2016 is likely the earliest GE Capital could be de-designated by FSOC, largely because of the council's lengthy process for reviewing applications.
"What's happening is the wheels of government are moving slowly and you just don't flip a toggle switch [on this designation] and presto they are de-designated," he said. "The FSOC has never de-designated a SIFI and they will create a process for doing that."
A regulatory lawyer raised questions about what the FSOC may do with the remaining assets in GE Capital and whether the council would want to have that remain designated or not. "What happens to the remaining string of assets that stay at GE Capital?" he asked. "They didn't say what happens to that."
He added that Wells Fargo is unlikely to need to make an application to the Office of the Comptroller of the Currency, to obtain formal approval for the acquisition since it is a major purchase of loans as opposed to a merger. "This probably won't require an application from WFC to OCC but WFC will have a lengthy set of discussions with supervisors," he said
He suggested that regulators will likely applaud the move because it delink's banking and commerce and perhaps reduces systemic risk to the financial system. He added that delinking assets that should be supervised in the bank regulatory space from the commercial business space will help reduce GE's regulatory headaches significantly.
"Regulators don't like the mixing of banking and commerce so now you de-designate and the assets that caused GE Capital to be designated as a SIFI are no longer on GE's balance sheet," he said.
Among nonbanks, the council had already designated AIG
, a key contributor to the financial crisis, in the category, MetLife
and Prudential Financial
.
And while real estate investments and lending were never a key fit with GE's industrial business, they are an essential part of Blackstone's real estate business. Blackstone is the largest private equity investor in real estate, and it recently raised $14.5 billion from institutions for a real estate investment fund.
It is unclear whether the divestitures could put Blackstone in its regulatory crosshairs when it comes to the FSOC's SIFI designation process. Blackstone officials did not return calls. Wells Fargo is already a SIFI though it is considered one of the better performing of the largest U.S. institutions from a regulatory capital perspective. Its acquisition of additional commercial real estate is expected to result in -- at the very least -- further regulatory scrutiny by FSOC.
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