GE GETS OILFIELD GUSHER
Merging unit with Texas equipment co.
Boston-based General Electric Co.’s merger of its oil and gas business with Houston’s Baker Hughes Inc. will create the world’s second-largest oilfield services and equipment company with $32 billion in annual revenue, as the companies wager on a recovery of crude oil prices that started slumping in mid-2014.
GE will own 62.5 percent of the new public company, which will take the Baker Hughes name. GE is the world’s largest oilfield equipment maker, and the deal combines its oil and gas technology, manufacturing and digital platform with Baker Hughes’ oilfield services expertise in drilling and fracking.
“The new entity will be capable of providing end-to-end oilfield equipment, technology and services solutions at scale,” William Blair & Co. analyst Nicholas Heymann said.
GE Oil & Gas is GE’s only major businesses that was “sub-scale, lacked product breadth and measurably losing market share in a few key product lines,” Barclays analyst Scott Davis said. “If GE were to do nothing with this business, there was a risk of asset erosion over time,” he said. “This deal essentially bails both companies out of a competitively disadvantaged situation. The combination solves the vast majority of GE’s product gap problems.”
GE has been refocusing on its industrial roots after its financial business, GE Capital, ran into problems during the 2008 financial crisis. The merger accelerates its capability to extend its digital framework to the oil and gas industry, said chairman and CEO Jeff Immelt.
“This continues our strategy to create the premier digital industrial company,” Immelt said.
GE will contribute $7.4 billion to fund a special one-time cash dividend to existing Baker Hughes shareholders, who’ll have a 37.5 percent interest in the new Houston-and London headquartered company.
The merger strikes a good balance for GE and BHI bulls, because GE isn’t selling at the bottom, the valuation appears fair for Baker Hughes shareholders, and GE management retains control to roll out its digital/service focus across a broader oil and gas platform, Citi analyst Andrew Kaplowitz said.
“We think the transaction gives GE shareholders exposure to a better-positioned oil and gas equipment/services business with substantial runway for earnings growth even in only a modest market recovery,” Kaplowitz said.
The deal, expected to close in mid-2017, assumes a slow recovery in oil prices — $45 to $60 per barrel through 2019.
GE’s stock was down 0.41 percent yesterday, closing at $29.10 per share.