Future of Baker Hughes unclear as GE seeks exit

Houston energy giant again faces turmoil just months after merger

The future of Baker Hughes is again uncertain as its parent company, the financially struggling General Electric Co., considers unloading its ownership in the energy services giant just four months after acquiring a majority stake in a much- heralded merger.

The disclosure by the new GE chief executive John Flannery that he is seeking a way out of the deal consummated by his predecessor, Jeffrey Immelt, adds to three years of turmoil for the storied Houston firm that traces its roots back to a revolutionary drill bit invented by Howard Hughes Sr. more than a century ago.

Since November 2014, Baker Hughes has been buffeted by an unsuccessful takeover bid by its local rival, Halliburton, and battered by the worst oil bust in a generation before seemingly getting rescued by a merger with GE’s oil and gas division, which closed in July.

GE owns 62.5 percent of Baker Hughes, but it’s still

unclear how it might divest its holdings. GE, headquartered in Boston, could seek a single buyer or unload the stock in smaller sales to investors and financial institutions, analysts said. But either way, Baker Hughes eventually would lose the benefits of GE’s deep pockets, industrial reach and digital strengths.

“The new GE leadership is not a fan of businesses that are inherently cyclical, ” said Byron Pope, an energy analyst with Houston investment bank Tudor, Pickering, Holt& Co. “That’s oil and gas by its nature.”

The possibility of a GE exit from Baker Hughes comes as Flannery seeks a broader transformation of the sprawling industrial conglomerate into a more tightly focused and profitable company to satisfy unhappy investors. GE recently reported that its third quarter earnings fell by 50 percent from a year earlier and said earlier this week that it would slice its dividend in half — only the second time that company has cut the investor payout since the Great Depression.

GE stock continues to slide

GE’s stock has plummeted more than 40 percent since the beginning of the year, including about 12 percent this week.

Flannery told analysts Monday that the company plans to focus on health care, aviation and power while putting its transportation business and lighting division up for sale. Selling the lighting division is particularly symbolic since the company was founded by Thomas A. Edison to commercialize the electric light bulb he developed.

Flannery also confirmed that the company was exploring “exit options” for Baker Hughes.

Under the merger agreement, GE is restricted from pulling out of the company until 2019, leaving the future of Baker Hughes in limbo and creating more worries for its 65,000 employees worldwide, including several thousand in Houston. Baker Hughes has been cutting jobs in recent months as it integrate operations of the merged companies, but has declined to disclose the number of layoffs.

The merger with GE’s oil and gas division created a new company with a stock market value of $35 billion and vaulted Baker Hughes from a distant third in energy services to the second largest, behind Schlumberger and slightly ahead of Halliburton. The deal was widely viewed as a good fit that combined Baker Hughes’ strengths in drilling and equipment with GE’s breadth and international scale.

It’s impossible to tell how a breakup might unfold, said James West, an energy analyst at the investment bank Evercore in New York. But it would likely wait for further strengthening in the energy industry when GE could sell its stake for more. Baker Hughes stock rose 9 cents Wednesday to $30.60 a share.

Seeking multiple investors

The most likely sale scenario, analysts said, is GE would sell its shares in the market to multiple investors, rather than a single buyer. That’s because the list of potential buyers is short, limited to a few large industrial companies such as the German conglomerate Siemens.

If Halliburton or Schlumberger attempted a deal, they would almost certainly run into antitrust problems.

Baker Hughes could survive — and even prosper — without GE, given it has at least two years to integrate operations and technologies and build its markets before it would become an independent company again, said Jim Wicklund, an energy analyst at the financial services company Credit Suisse in Dallas.

“How long do youhave to keep living with Mom once you have your own job?” Wicklund said.

Lorenzo Simonelli, who led GE Oil & Gas before becoming Baker Hughes CEO in July, declined interview requests this week. But, while speaking this week at an energy conference in Abu Dhabi, he said “the new normal is continuous disruption” in the energy sector, and companies must innovate and adapt.

Simonelli also was a finalist in the competition to succeed Immelt, ultimately won by Flannery.