GE Overhang Looms for Synchrony Before Planned IPO

By Leslie Picker, Elizabeth Dexheimer and Richard Clough

You can take Synchrony Financial (SYF) out of General Electric Co. (GE) It’s a much longer process to take GE out of Synchrony.
GE is spinning off its consumer-lending arm -- known for issuing private-label credit cards for Wal-Mart Stores Inc. (WMT) and Amazon.com Inc. -- as part of a plan to shrink its finance unit and focus on industrial assets. Synchrony plans to raise as much as $3.3 billion in its initial public offering set to price today, which would be the largest in the U.S. this year.
GE, with a $260 billion market value, said it will keep a stake of as little as 83 percent following the IPO and delay its full exit until after receiving regulatory approval late next year. That leaves new investors with a question: How exactly will GE separate?
“The GE overhang is going to keep people from wanting to pay a lot for the company,” said David Ellison, a money manager who oversees $5.5 billion including financial stocks at Hennessy Advisors Inc. in Boston and attended the Synchrony roadshow. “It has to be at a discount -- that’s why you would buy it.”

Synchrony plans to price 125 million shares at $23 to $26 apiece tonight. It is seeking a market value as high as $22 billion. GE isn’t selling shares, and proceeds will be used to pay debt owed to GE Capital Corp.
Ally Financial Inc. (ALLY), the auto lender rescued by the U.S. government during the 2008 financial crisis, raised about $2.6 billion after its April debut, the largest IPO in the U.S. this year, according to data compiled by Bloomberg. At the low end of its price range, Synchrony would still surpass Ally by raising $2.9 billion.

GE’s Options

GE says it expects to make a tax-free distribution of its remaining Synchrony stock to willing shareholders, preserving the option for another type of transaction.
Seth Martin, a spokesman for GE, referred questions to Synchrony. Samuel Wang of GE Capital, responding on behalf of Synchrony, declined to comment.
While Synchrony’s name is just months old, its predecessor traces back to the Great Depression, when Americans needed help financing purchases of their GE appliances, from air conditioners to washing machines. During the latest crisis, GE Capital put the parent company at risk, prompting Chief Executive Officer Jeffrey Immelt to divest assets within the unit.
GE has not yet determined how it will separate the remainder of Synchrony. While a two-stage exit creates uncertainty for prospective Synchrony investors, the Fairfield, Connecticut-based parent company said it could benefit GE shareholders. The process is “the most tax-efficient, shareholder-friendly way” to divest Synchrony, GE Chief Financial Officer Jeff Bornstein said in a July 18 interview.

Credit Cards

As part of its private-label card business, Synchrony partners with retailers to issue credit cards to shoppers. Synchrony has been the largest issuer of store credit cards for the past decade and makes up 42 percent of the market, according to the Nilson Report, an industry newsletter that tracks the payments industry.
Synchrony’s network of retailers, manufacturers and health-care providers makes the company “particularly well-positioned to benefit from increases in U.S. consumer spending and credit utilization during the next few years,” Mark Palmer, an analyst at BTIG, said in a July 24 note. Palmer recommends that investors buy shares at the high end of the range.
At the same time, Synchrony will face higher borrowing costs once it separates from GE, Palmer said. He projects Synchrony will generate profit of $1.73 billion this year, a decline of 13 percent from 2013, which indicates a valuation of 12.5 times this year’s earnings at the high end of the range. That’s higher than the 11.7 times Discover Financial Services (DFS) is trading, and the 10.4 times for Capital One Financial Corp. (COF)

Interest Rates

Interest rates on many private-label cards can be between 25 percent and 28 percent compared with about 15.6 percent rate for general purpose cards such as those that run on Visa Inc. (V) or MasterCard Inc. (MA) networks, according to Michael Misasi, a payments analyst at Mercator Advisory Group Inc.
While many holders of private-label cards don’t qualify for other types of credit products, their lines of credit are often lower as the cards can only be used in one store, Misasi said.
“One of the challenges is identifying new opportunities because all of the largest retailers are often going to be locked up in a contract that’s anywhere from three to seven years,” Misasi said. Banks must “identify who are the fastest growing retailers.”
Some consumer-finance firms have slipped since IPOs this year. Ally has declined 5.8 percent since its offering. Subprime car lender Santander Consumer USA Holdings Inc. (SC) has slumped about 19 percent after its $2 billion debut in January.
“Synchrony’s ability to push pricing is going to be limited because of what happened with Ally and Santander,” said Jeff Davis, managing director of financial institutions at advisory firm Mercer Capital in Nashville, Tennessee. “I think the shares and the performance of the company are going to be fine since the risk-return profile of Synchrony looks a lot better relative to Ally and Santander.”