Tuesday, July 22, 2008

GE extends global reach to Middle East

General Electric has joined the growing procession of US companies seeking solace from their domestic problems in the Middle East.

But unlike Citigroup, Merrill Lynch and the other troubled banks that headed east to ask for billions of dollars in rescue funds, GE is trying to harness its geographical and product reach to increase its exposure to the fast-expanding region.

That is why GE’s deal with Mubadala, Abu Dhabi’s state investment vehicle, is both far-reaching and potentially controversial.

In the short-term, the agreement creates an $8bn joint venture between GE Capital and Mubadala to invest in commercial finance across the Middle East and other developing markets.

The move is part of plans by Jeffrey Immelt, GE’s chairman and chief executive, to reduce the reliance of the group’s huge finance arm on the turbulent US market and kick-start its sluggish share price by investing in rapidly growing economies

In spite of periodic calls from analysts and investors for a break-up of GE into its industrial and financial units, Mr Immelt believes the cheap funding and financial firepower provided by GE Capital are crucial to the success of the rest of the group.

But with the US market likely to remain in the throes of the credit crunch for months to come, Mr Immelt wants the finance unit to cast its net wider.

GE has already put its US private label credit card business up for sale and has divested billions of dollars in mortgage-related assets. Tuesday’s agreement should enable it to shift more of its focus towards the Middle East – the fastest-growing region for GE last year.

As Mr Immelt told investors, the deal “allows us to . . . reallocate to higher return opportunities in commercial finance, which is what we have talked about strategically over the last nine months or so.”

But the partnership goes beyond the commercial finance venture and ancillary deals on clean energy and corporate training.

Mubadala, which also owns stakes in Ferrari and the buy-out firm Carlyle Group, has vowed to become one of GE’s top-10 shareholders by buying stock in the open market.

The move, which would cost Mubadala about $3.4bn at Tuesday’s market price, could help GE by adding a long-term investor to a shareholder base that is often seen as too focused on quarterly results.

Indeed, GE executives say that one of the few advantages of the 24 per cent slide in the company’s shares since January is that it has driven many short-term investors away, leaving a hard-core of value-oriented funds.

However, in a US presidential year, the sight of a Middle Eastern investment fund buying up shares in a US corporate bellwether such as GE might cause a political backlash.

Mr Immelt brushed away such suggestions on Monday, saying the partnership “was all about business”.

GE executives hope that having a partner with the connections and reach of Mubadala – which has investments in sectors ranging from real estate to healthcare, aviation and energy – will help the company win other business in the Middle East.

The region contributed just $5bn to GE’s $173bn of sales in 2007 but that was a jump of more than 50 per cent over the previous year.

Over the past few years, Mr Immelt and his lieutenants have worked hard to build relationships in the region, in an effort to increase sales of GE’s infrastructure such as oil and gas equipment, and other manufacturing products.

Last year, for example, GE sold its plastics business to a Saudi state-controlled company, in a deal that cemented its already strong ties to the kingdom.

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