What is Ailing GE ?

>Swaps are killing us softly

Investors in the U.S. conglomerate largely shook off Friday’s news that it was slashing its dividend by 68 percent, as Wall Street had widely expected some cut to the quarterly payout. A reduction in its top-tier credit rating is viewed as the next domino to fall, but that is by no means the last item on shareholders’ worry lists.

Higher losses at GE Capital, a possible writedown at NBC Universal media and even the chance that an activist investor could take advantage of a beaten-down share price to try to force a change at GE are among the possibilities investors are considering.

GE shares have lost 75 percent of their value over the past year, a steeper slide than either the blue-chip Dow Jones industrial average .DJI or the broad Standard & Poor’s 500 index .SPX have witnessed.

A 10 percent fall in GE’s share price on Monday pushed the company’s market capitalization to $81 billion. That is less than one-third of GE’s $245 billion market cap in October, but still above the combined valuations of United Technologies Corp (UTX.N), Walt Disney Co (DIS.N) and Citigroup Inc (C.N).

The toppling of a company that a year ago stood as the world’s second-largest by market capitalization opens the possibility that GE could lure an activist investor seeking to force a change in strategy or management.

“It takes a lot of money to rattle the fences, so to speak, but they definitely leave themselves open to something like that,” said Daniel Holland, an analyst at Morningstar in Chicago.

While such a campaign is possible, other investors note that several factors militate against it.

One is that respected financier Warren Buffett has shown interest in the company. His company, Berkshire Hathaway Inc (BRKa.N), last year invested $3 billion in GE, buying preferred shares with the option of acquiring another $3 billion in common stock at $22.25 per share — almost three times GE’s current stock price.

Another is that in the context of the tight credit markets and sharp drop in stock prices around the world — the S&P 500 hit on Monday its lowest point since 1996 — could make even activist investors uneasy about taking on the Fairfield, Connecticut-based company.

“That’s an awful big bite,” said Wayne Titche, co-manager of the AHA Diversified Equity Fund in Grand Rapids, Michigan, which owns GE shares. “In today’s credit environment, that’s an awful lot of money to borrow. I think that game is dead.”

PLENTY TO THINK ABOUT

Both GE stockholders and investors in its debt have a lot on their minds these days. The credit-default swaps of its GE Capital finance arm traded “upfront” for the first time on Monday, meaning that investors wanting to insure $10 million of GE Capital debt for a year had to pay $850,000 straight away plus an additional $500,000 over the course of the year.

The switch to upfront trading typically is a sign of greater perceived risk.

Even after the dividend cut, Moody’s Investors Service and S&P continue to evaluate their triple-A ratings on GE with an eye toward a possible downgrade. Continued…

“The AAA rating is unsustainable even with a dividend cut,” wrote BernsteinResearch analyst Steven Winoker in a note to clients.

Investors also worry that its hefty GE Capital unit, which makes commercial loans, invests in real estate and still has a sizable U.S. private-label credit-card business, will need to raise its estimated loss reserves.

“From our perspective, the biggest area of risk is still the private-label credit cards,” due to its exposure to harried — and increasingly unemployed — U.S. consumers, said Titche. GE last year tried to sell that business but found no takers and is instead trying to pare down what was once a $30 billion business.

Investors were also confronted with the news on Monday that European entertainment group Vivendi SA (VIV.PA) was writing down the value of its 20 percent stake in NBC Universal media, in which GE owns the remaining equity.

Some wondered if GE might need to make a similar move. It had $18.97 billion worth of NBC-related goodwill on its books at the end of 2008, according to a filing with the U.S. Securities and Exchange Commission.

“Whether or not Vivendi is doing it, how many companies are writing down goodwill because the future value of these things are in question?” said Peter Klein, senior portfolio manager at Fifth Third Asset Management in Cleveland, which owns GE shares. “Once that happens, you start to look at the earning power of those assets and say, ‘Maybe they’re not going to earn me as much, so I have to write them down.'”

GE spokesman Russell Wilkerson said there was “no need for a writedown” of the NBC assets.

Still, some investors said GE’s trimming of its dividend — a move the company said as recently as January was not under consideration — indicated GE was becoming more willing to make major changes to address a serious global recession.

“The optimism has to be replaced by sober realism,” said Klein. “It would reflect management begrudgingly giving in to the market here. They might as well just do it all and get it over with.”