General Electric (GE, Financial) announced an agreement to combine GE’s oil and gas operations with Houston-based Baker Hughes (BHI, Financial) Monday.
The companies said the deal will create a “world-leading oilfield technology provider.” The “new” Baker Hughes, as it is referred to by the company, will combine GE’s technology expertise and Baker Hughes’ oilfield services to provide the best “physical and digital technology solutions for customer productivity.” The new company will have $32 billion in combined revenue and operate in over 120 countries.
“This transaction creates an industry leader, one that is ideally positioned to grow in any market. Oil and gas customers demand more productive solutions. This can only be achieved through technical innovation and service execution, the hallmarks of GE and Baker Hughes,” Jeff Immelt, chairman and CEO of GE, said. “As we built the GE Oil & Gas business, I have always been impressed by the respect our customers have for Baker Hughes. GE Oil & Gas is a key GE business, one that fully leverages the GE Store. As we go forward, this transaction accelerates our capability to extend the digital framework to the oil and gas industry. An oilfield service platform is essential to deliver digitally enabled offerings to our customers. We expect Predix to become an industry standard and synonymous with improved customer outcomes.”
If the deal goes through, it would be among one of Immelt’s biggest deals. Since 2007, GE has built its oil and gas business through $14 billion in acquisitions.
Baker Hughes recently had to abandon a merger attempt with Halliburton (HAL, Financial), as it was rejected by regulators.
According to the terms of the agreement, the deal is in a partnership structure with each company contributing its operating assets to the new business.
Baker Hughes shareholders will receive a special one-time cash dividend of $17.50 per share and 37.5% of the new company. General Electric will own 62.5% of the company and will contribute $7.4 billion to fund the special dividend.
Boston-based GE said its shareholders will benefit through the ownership of a stronger business, substantial synergies and an improved competitive position. The company said the transaction is expected to be accretive and will add approximately four cents to its earnings per share in 2018 and predicted it will reach eight cents by 2020.
The two companies expect to generate total run rate synergies of $1.6 billion by 2020, which has a net present value of $14 billion.
The new company will have dual headquarters in Houston and London. The deal is expected to close in mid-2017 upon the approval of shareholders and regulators.
Ken Fisher (Trades, Portfolio) is General Electric’s largest shareholder among the gurus with 0.35% of outstanding shares, which is 1.94% of his total assets managed. In all, 37 gurus hold a position in the company.
Jeff Ubben (Trades, Portfolio) is Baker Hughes’ largest shareholder among the gurus with 9.2% of outstanding shares, which is 15.9% of his total assets managed. In all, 17 gurus hold a position in the company.
The DCF Calculator gives General Electric a fair value of $10.59; it was trading at $29.34 on Monday. The DCF Calculator gives Baker Hughes a fair value of $-81.97; it was trading at $58.25 on Monday.
Disclosure: I do not own stock in any companies mentioned in the article.
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