One of the biggest headlines recently was that General Electric (GE) is going to split its business into three separate businesses. They’re going to spin off their health care business in 2023, and it will spin off the power business in 2024, leaving the aviation business as what’s left of GE.
The CEO has been dismantling this company since he took over in 2018. He sold the biopharmaceutical business for about $21 billion, and he sold the aircraft leasing business for an additional $30 billion, as well as a ton of smaller companies along the way to generate about $75 billion in cash that has primarily been used to pay down debt.
Now, I’ve been watching this really closely, and nothing’s actionable yet. However, when that energy segment gets spun off, I’m going to be very interested because they have refocused that segment on the renewable energy side of the business.
This is going to become a massive renewable energy story with huge growth potential, but this is still down the road quite a bit.
But the reason I found this story so interesting is that within minutes of this GE announcement being made, the analysts started to come out and say that this is the “death of the conglomerate.” But I’ve seen this movie before…
Back in the 1980s, as the break-up wave was just getting started, it was a wildly profitable time as these companies were taken over at huge margins before being broken up. And quite often the divisions were spun off at really attractive prices.
Maybe this is the start of the next break-up cycle or maybe not, but it will be equally profitable either way. But it there will never be an end to the conglomerate, as they come into being because companies with a ton of cash don’t know what else to do with it. So, they buy other companies and hope that earnings grow and both businesses perform well. Sometimes this works, and sometimes it doesn’t.
For GE, this did work for a long time, and I’m not going to be shocked to see the aviation division begin to make acquisitions and become another conglomerate altogether. Conglomerates are not going to come to an end any time soon.
Tejon Ranch Co.
Now, one of my favorite conglomerates right now, which I really wish would break up because they minute they’re broken up they’d be taken over by competitors, is Tejon Ranch Co. (TRC).
This company’s core businesses include real estate development, resort properties, ranch operations, farming and mineral and water rights. They’ve got a lot of land in California, and they’ve got properties all over the state including apartments as well as commercial and industrial space, including a major distribution center for some other retail companies.
They’ve also got restaurants and entertainment facilities, and the farming business focuses on pistachios, almonds and even wine grapes as their major cash crops. All of these businesses are profitable to some degree, and combined they’re all worth a lot more than the combined package of Tejon Ranch Co. trading as a single entity.
I think the assets are worth at least twice the current stock price as standalone entities, and I think someone would be willing to pay that price for them. When this company is fully built out, the company will consist of 35,278 housing units, 35 million square feet of commercial and industrial space and about 750 hotel rooms, plus the farms, hunting and fishing leases, and water and mineral rights.
So, this is a conglomerate that probably isn’t going to get broken up any time soon, and from a long-term perspective, we should see profits continue to grow. There’s also lots of land left to develop in areas that are accessible to major population centers, so their properties will stay in demand. Their water rights business can also drive fantastic growth down the road.
While I’d love to see Tejon Ranch Co. get broken up, but we can still make a lot of money in this stock even if that doesn’t happen.
Once again, conglomerates here are stay, and so are those who tell us that conglomerates are going to die off some day. They are not, but we are just going to keep looking for ways to make money whether the conglomerate lives or is broken up.
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