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Will GE’s Healthcare Unit Spin-Off Increase Shareholder Wealth?

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Dec. 11 2018, Updated 9:00 a.m. ET

Healthcare unit spin-off

General Electric’s (GE) Healthcare segment offers medical imaging and information technologies, biopharmaceutical manufacturing technologies, and patient monitoring systems. The segment is one of the company’s better-performing units. The Healthcare segment is the fourth-largest contributor to General Electric’s total revenues. In 2017, the segment’s revenues and operating profit increased 4.5% and 9%, respectively, on a YoY (year-over-year) basis.

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As part of the company’s major restructuring plan in June, General Electric intends to spin off the segment and turn it into a standalone entity. The spin-off move is expected to complement General Electric’s ambition of focusing on core businesses and driving its long-term sustainable growth and margins.

As part of General Electric’s separation plan, the company intends to sell 49.9% of its healthcare business and distribute the remaining stake to shareholders in a tax-free spin-off. The company should be able to maximize shareholders’ returns and enhance its liquidity position.

Healthcare business

General Electric’s Healthcare segment accounted for 17.2% of the company’s total revenues—slightly higher than the contribution of 16.5% in the third quarter of 2017. In the third quarter, the division’s sales grew 3% YoY on an organic basis mainly due to 5% growth in its Life Sciences business and a 3% increase in its Healthcare Systems business. On an organic basis, the segment’s orders rose 3%. The Life Sciences orders increasing 6%, while the Healthcare Systems orders rose 2%.

The segment’s third-quarter operating profit rose 2% YoY to $861 million on a reported basis, while its margin expanded by 30 basis points to 18.3%. Organically, the segment’s operating profit rose 10%. The segment’s margin expanded by 120 basis points due to higher volumes and efficient cost management. The increase was partially offset by reduced pricing.

General Electric’s Healthcare segment competes with Baxter International (BAX), Boston Scientific (BSX), and Abbott Laboratories (ABT). They registered YoY rises of 25%, 12.9%, and 13.6%, respectively, in their third-quarter EPS.

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