When Wells Fargo (NYSE: WFC) announced on April 10 that it was buying a portion of General Electric’s (NYSE: GE) GE Capital corporate loan portfolio and financing another large portion of it for The Blackstone Group (NYSE: BX) to buy, investors were interested.
Just four days later, when Wells Fargo turned in quarterly earnings which revealed negative earnings growth for the first time in more than four years, investors turned that interest into a frenzy.
Did Wells Fargo make the move because of its weaker than expected quarter? If GE couldn’t make the loan portfolio work, how can Wells Fargo?
These are the questions investors are rightfully asking. The answers, however, are less than forthcoming.
Let’s back up and look at what Wells Fargo is as an entity, what Blackstone is, and more importantly, what these General Electric loans can do for them.
Wells Fargo is already the country’s largest commercial lender. That’s a big statement. And that’s an even more monstrous fact.
Commercial real estate is the lifeblood of a modern economy. Without thriving businesses, there are no thriving residential properties. There are no development sites for future businesses, community buildings, schools or housing. Commercial real estate is, to say the least, important. And Wells Fargo, the once small-time West Coast bank with a logo of a stagecoach, is now the country’s leading commercial lender.
More impressively, if not importantly, Wells Fargo made it through the financial crisis of 2008-2009 not only safe, but improved. It took what other banks broke, bought the good parts – such as what was left of Wachovia – and integrated it into a highly profitable and growth operation. That’s impressive.
Blackstone, on the other hand, has dabbled in just about everything. As of two years ago, it was doubling down on residential real estate – not necessarily a bad proposition considering the terms it was getting. And a moment’s glance at its profits or its stock price will tell you that this is one private equity firm that knows what it’s doing. When it makes a deal, you ought to pay attention.
Finally, the biggest question remaining for most investors that haven’t followed the GE Capital story these past two years: What good is this loan portfolio if a behemoth financing and industrial company like GE doesn’t want it?
The connection and answer to all of this is very simple. GE is leaving behind, piece by piece, the old financial arm of former CEO Jack Welch. A several hundred billion dollar business, however, isn’t the easiest to divest. And when the time was right to sell off a portion of its commercial real estate portfolio, who else would the new industrial-focused management turn to other than Wells Fargo?
GE wants to divest its large portfolio responsibly and in its own investors’ interest. Wells Fargo had a rough quarter and wants to expand its portfolio to prevent another disappointing quarter for investors. Blackstone is a top-notch operation that wants to join up and receive cheap financing through the deal.
What I can honestly say is everyone wins. GE is able to cut away one more piece on its road toward being a true industrial manufacturing company again. Blackstone is able to build its ever-growing portfolio cheaply and efficiently. And Wells Fargo, the money in this family of businesses, is able to take advantage of the choicest bits of the GE Capital deal at just the right price.
Comparatively, Wells Fargo is in a good place. Not only was this deal relatively cheap – it cost Wells Fargo just $9 billion, less than half of its current pocket change on hand – but it gave a company desperate to expand its key portfolio sector a great set of assets that were already performing well for GE.
If you take one final step back and look at it all, it’s the Blackstone portion of this deal that puts the cherry on Wells Fargo’s pie. Blackstone is insanely profitable. Wells Fargo is financing the vast majority of Blackstone’s cut of this GE sale. Wells Fargo could even lose money on its own investment and still come out ahead by simply striking this deal.
If you are lacking any kind of financial industry allocation, Wells Fargo is my first choice. Is this GE deal going to make or break the company? No. But it proves yet again that this is one company that is always looking for bigger, better business – without taking the chances its competitors make far too often.
The Next Tremendous Growth Industry
Speaking of growth markets, there’s one taking off right now that no investor can afford to ignore. Why? Well, research and consulting firm McKinsey believes this market will grow as much as 14,000% larger by 2025. That’s no joke. What’s more, it’s being led by what could be the biggest technological achievement of all time. If you’re a serious growth investor, this is one story you absolutely do not want to miss out on. Tyler Laundon has all the details for you right here.