GE, Baker Hughes cre­ate pow­er­ful new player in en­ergy sec­tor

Jamaica Gleaner - - BUSINESS - – AP

GEN­ERAL ELEC­TRIC is tak­ing ad­van­tage of a pro­longed en­ergy slump to be­come a big­ger player in the oil and gas drilling busi­ness, a bet that could pay off big when prices re­cover.

GE and Baker Hughes Inc will com­bine their oil and gas op­er­a­tions, cre­at­ing a ma­jor player in the oil­field ser­vices in­dus­try with the en­ergy sec­tor bogged down now for years by weak and volatile com­mod­ity prices.

The new com­pany will still be called Baker Hughes, but GE will own 62.5 per cent of it.

Hal­libur­ton Co at­tempted a buy­out of its ri­val ear­lier this year, but aban­doned the US$35 bil­lion bid af­ter United States an­titrust reg­u­la­tors stepped in.

Baker Hughes is the smallest of the three in­ter­na­tional oil­field-ser­vices com­pa­nies, which con­trib­ute equip­ment and ex­per­tise to help oil and gas com­pa­nies drill and keep wells run­ning.

Baker Hughes has a mar­ket cap­i­tal­i­sa­tion less than a third that of in­dus­try leader Sch­lum­berger Lim­ited. By com­bin­ing with GE, how­ever, its an­nual es­ti­mated rev­enue will more than dou­ble to US$32 bil­lion, much closer to Sch­lum­berger, which has an­nual rev­enue of US$35.5 bil­lion.

GE CEO Jeff Im­melt said the tie up, “ac­cel­er­ates our ca­pa­bil­ity to ex­tend the dig­i­tal frame­work to the oil and gas in­dus­try”.

GE is likely to use the deal to pro­mote wider adop­tion of its in­dus­trial In­ter­net plat­form, said James West, an an­a­lyst with Ever­core ISI. Per­ceived value in the oil busi­ness is shift­ing from hard as­sets like wells to tech­nol­ogy and data, he said.

And with im­mense pres­sure due to tum­bling com­mod­ity prices, GE’s tech­nol­ogy arse­nal could be a highly val­ued com­mod­ity in and of it­self.

Com­pa­nies like Sch­lum­berger, Hal­libur­ton and Baker Hughes are of­ten among the first to feel the pinch of weak prices, as ma­jor oil com­pa­nies pull back on cap­i­tal spend­ing or rene­go­ti­ate ex­ist­ing con­tracts with them.

Af­ter se­vere declines in the price of oil and gas dur­ing the re­ces­sion, prices ap­peared to re­cover and sta­bilise, but with pro­duc­tion charg­ing for­ward, prices be­gan to slump again in mid2014. That has cre­ated new head­winds for Baker Hughes and its ri­vals.

Im­melt told CNBC Mon­day that the deal will help GE weather the oil slump, and “if pric­ing gets bet­ter it al­lows us to ben­e­fit from that as well”.

Be­cause the deal is struc­tured as a com­bi­na­tion of two com­pa­nies, it will cost GE far less – a US$7.4 bil­lion con­tri­bu­tion plus its oil and gas busi­ness, with about US$13 bil­lion in sales – than an out­right ac­qui­si­tion. Yet GE will still be able to cap­ture more the up­side when com­modi­ties re­bound.

The deal was unan­i­mously en­dorsed by di­rec­tors of both com­pa­nies but needs the ap­proval of Baker Hughes share­hold­ers and reg­u­la­tors. Baker Hughes share­hold­ers would get a one-time cash div­i­dend of US$17.50 per share and own 37.5 per cent of the new com­pany, with GE own­ing the rest. The com­pa­nies ex­pect to close the deal in mid-2017.

GE said the deal would add about 4 cents per share to GE earn­ings in 2018 and 8 cents per share by 2020.

Lorenzo Si­monelli, pres­i­dent and CEO of GE’s oil and gas busi­ness, would be­come CEO of the new Baker Hughes and Im­melt would be­come chair­man. Baker Hughes CEO Martin Craig­head would be vice chair­man. GE would pick five of the nine di­rec­tors.

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