Manufacturing conglomerate General Electric will combine its oil-and-gas business with energy services provider Baker Hughes in a deal that structures the new publicly traded entity as a partnership jointly owned by each company’s shareholders.
The deal comes nearly six months after Baker Hughes’ previous merger agreement with rival Halliburton collapsed following a regulatory fight with the U.S. government.
It also comes as GE seeks to remake itself as a company more narrowly focused on digital technology solutions, having already greatly reduced its GE Capital division and sold its appliance business. GE CEO Jeff Immelt revealed Monday that the company is also in discussion with potential buyers to sell its water products business, with annual earnings before interest, taxes, depreciation and amortization of $250 million to $350 million.
Baker Hughes is still reeling from oil’s devastating slide below $30 per barrel earlier this year — despite a recent recovery to about $50 — which has led companies to seek consolidation opportunities to navigate the rough terrain. Baker Hughes’ revenue through the first nine quarters of 2016 fell 39.8% to $7.4 billion, compared with a year earlier, while its net loss widened from $936 million to $2.3 billion.
GE and Baker Hughes said the new company would have $32 billion in annual revenue and employ about 70,000 people. The companies expect to achieve $1.6 billion in annual “synergies” — which typically include cost cuts and combined purchasing power — by 2020.
The synergies amount to $1.2 billion in costs and $400 million in revenue opportunities, according to a presentation prepared for investors. The companies expect to complete the deal by mid-2017.
GE shareholders will own 62.5% of what the companies called “the new Baker Hughes.” Current shareholders of Baker Hughes will be apportioned 37.5% of the new entity and will receive a one-time special dividend of $17.50 per share.
The dividend payment will cost GE $7.4 billion, but it could be worth it to shed a unit that has dragged down the company in recent quarters. The oil and gas division’s third-quarter revenue slumped 24.7% to $2.96 billion and its operating profit plunged 42.1% to $353 million.
“We’ll have scale, diversification and a great team,” Immelt said on a conference call. “The new company is exceptionally well positioned to serve our customers.”
Baker Hughes shares jumped 8.7% to $64.26 in pre-market trading but the gains didn’t last. Shares dove 6.3% to close at $55.40. GE shares edged 0.4% lower to $29.10.
With operations in more than 120 countries, the combined company will maintain dual headquarters in Houston and London.
Immelt will become chairman of the new company, and GE Oil and Gas CEO Lorenzo Simonelli will retain that title with the combined entity. Baker Hughes’ chairman and CEO, Martin Craighead, will become vice chairman of the new company.
Of the nine board members of the new company, GE will appoint five and Baker Hughes four.
Craighead said the deal is particularly appealing because of the opportunities afforded by GE’s digital capability, including software that enhances data analysis viewed as critical to energy industry’s future.
“We see an opportunity to unleash the power of digitization and data that has long been anticipated in the oil and gas sector,” Craighead told investors.
Still, the combined company may not fare much better if oil prices languish. The commodity’s slide over the last two years has pelted companies across the sector, but Craighead said the new Baker Hughes “will be far more resilient and cycle resistant,” with a presence in upstream, midstream and downstream oil.
Immelt said the deal projects oil prices of $45 to $60 per barrel through 2019, with a steady uptick over that period.
GE’s oil and gas division includes surface wellheads, downhole tools, subsea systems, compressors, turbines, measurement equipment and services. Baker Hughes’ business includes drilling services, oil well construction, completion equipment and reservoir analysis.
The company had agreed in late 2014 to a merger with Halliburton. But they nixed the deal in early May 2016 after the Obama administration filed a lawsuit seeking to block the accord as a violation of anti-trust laws.
Although regulators will need to sign off on the new deal, Simonelli told investors that there’s “minimal overlap” between the two companies and “we feel confident” the deal will clear antitrust scrutiny.
Baker Hughes collected a consolation prize, however: a $3.5 billion breakup fee from Halliburton.