Baker Hughes nears its independence from GE
Less than two years after a $23 billion merger made it a subsidiary of the industrial conglomerate General Electric, the Houston oil field services company Baker Hughes is one step closer to becoming an independent company again.
General Electric, headquartered in Boston, said Tuesday it would reduce its 62.5 percent stake in Baker Hughes to as low as 50.1 percent by July through series of stock sales estimated to raise about $4 billion in cash. GE intends to divest all its holdings in Baker Hughes, the company said in previous statements.
Baker Hughes, a storied Houston firm that traces its roots to Howard Hughes Sr., became a unit of GE last year following its merger with GE’s oil and gas division. The merger, supported by former CEO Jeffrey Immelt, was subsequently questioned by his successors, John Flannery, who was recently ousted, and H. Lawrence Culp.
Shortly after becoming CEO, Flannery suggested that GE would get out of the oil and gas business. Culp appears to be following through.
The stock sale comes as GE continues to struggle, reporting $22.8 billion loss in the third quarter. The sprawling company is considering selling other units as it tries to find the right size and focus to return to profitability.
Analysts and Baker Hughes officials said they expect little change in the size and holdings of the Houston company. No layoffs or asset sales are expected as GE divests.
“There will be no material impact to our outlook, strong balance sheet or ability to generate cash,” Baker Hughes CEO Lorenzo Simonelli said in a statement. “We remain well positioned to capitalize on the positive outlook for our industry and are focused on our top priorities of gaining share, improving margins and generating cash.”
Byron Pope, an analyst with with the Houston investment bank firm Tudor, Pickering, Holt & Co., said GE had few avenues but to sell stock on the market. Baker Hughes will buy up to $1.5 billion in its own stock under the agreement with GE. With Baker Hughes ranked as the third-largest oil field service company in the world, there are few companies capable of buying it.
A proposed merger between Baker Hughes and Houston-based competitor Halliburton failed in May 2016 when it could not overcome the Justice Department’s antitrust concerns. As a result, Schlumberger, the world’s largest energy services company, is unlikely to become a potential buyer.
GE’s stock sale, Pope said, was the best way for the company to quickly raise cash and honor the July 2019 lock-in provision of the merger agreement.
Although GE is struggling, Ed Hirs, an energy economist at the University of Houston, said Baker Hughes is a healthier company now than it was before the merger. At the time, Baker Hughes was battered from the oil bust and the failed merger, losing money, slashing jobs and facing a future as a distant third behind Schlumberger and Halliburton.
“Baker Hughes has thrived under the protection of GE,” said Hirs, while the recovery in the oil industry provided a boost.
After a string of losses, Baker Hughes reported a $13 million profit on nearly $5.7 billion of revenue during the third quarter.
GE and Baker Hughes also entered into long-term agreements for software, turbines and other technology. The deals give GE a customer for its products and services, and Baker Hughes access to GE’s state-of-the-art technology.
Jim Wicklund, an analyst with the global investment firm Credit Suisse, believes that Baker Hughes can become its own company again without layoffs and without selling any of its assets.
“They’ll probably have to hire people instead of laying people off,” Wicklund said. “Instead of using GE’s back office, they’ll have to create their own.”