In a move that has certainly grabbed the headlines, General Electric (GE) has agreed to combine its energy division with the oilfield services firm Baker Hughes (BHI). The merger creates the second-largest oil and gas company in the world.
Reportedly, the new company will be known simply as "Baker Hughes, a GE company." It will have dual headquarters in London and Houston.
The deal also comes in the midst of a slew of high-profile moves in mergers and acquisitions. With oil prices still trading below $50 per barrel, it has been suggested that one motivation for this deal is the bargain-level buying opportunity.
GE's CEO, Jeffrey Immelt, commented, “This is the right time in the cycle to invest. This was a unique opportunity. We wanted to grab it.” This fits with GE's pattern of acquiring equipment and services companies in order to aggressively expand its operations, which were already wide-ranging.
Shares of GE jumped almost 1% following the news while Baker Hughes saw its stock fall. Yet, the latter has seen gains above 25% already year-to-date.
It's interesting, of course, to think about a merger worth $32 billion as being a "bargain." (The estimated annual revenue of the merged entity is $32 billion, hence the valuation.) It is true, however, that chronically weak crude oil prices have caused many drillers in the U.S. to freeze production—and these idle oilfield operations are finally beginning to come back online. This could translate into a considerable windfall down the road for the combined companies.
General Electric will own 62.5% of the new Baker Hughes entity as a result of the deal. For existing shareholders of Baker Hughes, the merger will net them a handsome one-time dividend of $17.50 per share. Given the number of outstanding shares, GE is paying these investors over $7 billion collectively through the cash dividend. Prior to this deal, the GE oil and gas division accounted for roughly 14% of the company's revenue last year.
Betting Big on Energy
Baker Hughes was already the third-largest firm in the oil industry, trailing behind Halliburton (HAL) and Schlumberger (SLB). This merger would push the value of the new GE-owned Baker Hughes ahead of the giant Halliburton and perhaps put it in a position to go head-to-head with the top dog, Schlumberger.
In fact, Halliburton attempted to merge with Bakers Hughes earlier this year before the deal met resistance from regulatory authorities and fell through. (Apparently, GE was keen to jump in and negotiate its own combination immediately after the Halliburton bid collapsed.) Halliburton ended up paying $3.5 billion due to the deal falling through. GE would owe $1.3 billion if the same situation arises this time around. However, most analysts don't expect there to be much difficult in getting the deal approved by antitrust regulators because the two businesses are seen as complementary rather than overlapping.
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