GE, Baker Hughes Create Powerful New Player in Energy Sector 31 October 2016

GE, Baker Hughes create powerful new player in energy sector 31 October 2016

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 capitalization less than a third that of industry leader Schlumberger Ltd. By combining with GE, however, its annual estimated revenue will more than double to $32 billion, much closer to Schlumberger, which has annual revenue of $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."

In this Thursday, Jan. 16, 2014, file photo, a General GE is likely to use the deal to promote wider Electric logo is displayed at a store in Cranberry adoption of its industrial internet platform, said Township, Pa. General Electric and Baker Hughes are James West, an analyst with Evercore ISI. combining their oil and gas businesses to create a Perceived value in the oil business is shifting from powerful player in an energy sector buffeted by years of hard assets like wells to technology and data, he weak prices, announced Monday, Oct. 31, 2016. (AP said. Photo/Gene J. Puskar, File) And with immense pressure due to tumbling commodity prices, GE's technology arsenal could be a highly valued commodity in and of itself. General Electric is taking advantage of a prolonged energy slump to become a bigger player Companies like Schlumberger, Halliburton and in the oil and gas drilling business, a bet that could Baker Hughes are often among the first to feel the pay off big when prices recover. pinch of weak prices, as major oil companies pull back on capital spending or renegotiate existing GE and Baker Hughes Inc. will combine their oil contracts with them. and gas operations, creating a major player in the oilfield services industry with the energy sector After severe declines in the price of oil and gas bogged down now for years by weak and volatile during the recession, prices appeared to recover commodity prices. and stabilize, but with production charging forward, prices began to slump again in mid-2014. That has The new company will still be called Baker created new headwinds for Baker Hughes and its Hughes, but GE will own 62.5 percent of it. rivals. Halliburton Co. attempted a buyout of its rival Immelt told CNBC Monday that the deal will help earlier this year, but abandoned the $35 billion bid GE weather the oil slump, and "if pricing gets better after U.S. antitrust regulators stepped in. it allows us to benefit from that as well." Baker Hughes is the smallest of the three Because the deal is structured as a combination of

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two companies, it will cost GE far less—a $7.4 billion contribution plus its oil and gas business, with about $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 $17.50 per share and own 37.5 percent 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.

Cowen and Co. analyst Gautam Khanna said the companies fit well together strategically, and "we like the timing of the deal" during the trough of the oil-industry cycle.

In midday trading, shares of General Electric Co. rose 10 cents to $29.32, while shares of Baker Hughes fell 91 cents to $58.21.

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