GE’s bad timing strikes again in Baker Hughes divestiture
Move to dump stocks shows just how deep hole is for General Electric
General Electric Co.’s plan to unravel its Baker Hughes stake smacks of desperation.
The embattled industrial conglomerate said on Tuesday that it will start chipping away at its 62.5 percent stake in the Houston oilfield services company. GE gained this holding when it merged its energy assets into Baker Hughes in 2017. It was previously limited in its ability to dispose of the stake until July 2019, but those restrictions are now being lifted. GE will knock its stake down to just above 50 percent by selling stock back to Baker Hughes and offering another chunk to investors in the public market.
GE unofficially put its Baker Hughes stake on the block last year as then-CEO John Flannery tried to come up with a plan to refocus the company and plug its cash holes. But there were no elegant solutions for going about this, with the expectation of a wind-down adding weight to an already sagging Baker Hughes stock price. GE wanted to avoid the optics of a fire sale. But with GE’s cash crunch getting increasingly dire, it no longer has the luxury of time.
GE really couldn’t have picked a worse window to sell the stake if it tried. Baker Hughes plunged 7.3 percent on Monday to what would be its lowest price since 2002, absent adjustments for the GE merger and associated dividend payout. It was the company's lowest price since the transaction was completed.
For Baker Hughes, this arrangement gets a sick monkey partly off its back. GE will remain a majority shareholder for now, but it shouldn’t take long to get below that threshold once a new six-month lockup agreement expires. At that point, GE’s board representation will also drop from a majority to just one of nine directors. Meanwhile, Baker Hughes retains access to useful GE technology, particularly turbines.
With GE in turmoil and the oil market also taking a dive, the best thing Baker Hughes had going for it was share buybacks, topping up its dividends and putting its overall yield well above that of Schlumberger and Halliburton of Houston. Baker Hughes’s suspension of repurchases in the third quarter — ahead of beginning to disentangle itself from GE — weighed very heavily on the stock.
As far as radical change goes at GE, this isn’t it. Yes, the divestiture will bring in much-needed cash. Baker Hughes is buying back as much as $1.5 billion of stock from GE. The company’s planned offering of 92 million shares would yield about $2.3 billion,.
All in, that’s about as much cash as GE raised by cutting its quarterly dividend to a penny per share last month. And it will still fall short of giving GE what it needs to bring its debt burden to more manageable levels.
What both companies must hope is that this move toward an inevitable separation starts to alleviate the pressure on Baker Hughes’ stock, allowing GE to get higher prices for its residual equity. But the $1.5 billion Baker Hughes reduces its firepower for buybacks. Until those resume, Baker Hughes will struggle to shake off its discount, thereby limiting GE’s potential proceeds, too.
Divesting the Baker Hughes stake was always going to be an ugly process, and GE had to start somewhere. But this just further underscores how deep in the hole GE is, and how there’s no easy way out.