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General Electric Plans to Merge Its Oil and Gas Division With Baker Hughes | |
(about 13 hours later) | |
As oil and gas companies work their way through the worst slump in their industry in more than two decades, General Electric is making a huge move to bolster its own business that serves those companies. | |
The industrial conglomerate announced on Monday a deal to merge its oil and gas division with fellow services provider Baker Hughes, seeking to create a new giant in the field that could ride any recovery in oil prices. | |
“We can weather the cycle in the short term and we will be very well positioned to lead the industry going forward,” Jeffrey R. Immelt, G.E.’s chief executive, told analysts. | |
The complex transaction, coming months after the collapse of Baker Hughes’s planned merger with another oil field services company, Halliburton, will create a much bigger provider of equipment and services across the entire span of oil production, from drilling to pipelines to refineries. | |
Putting together G.E., which manufactures newer equipment and technology for the industry, and Baker Hughes, which has been a leading provider of traditional equipment like drill bits and pumps as well as other services, is meant to create a bigger rival to the likes of Schlumberger. Combined, the new company would have had revenue of $32 billion last year, compared with Schlumberger’s $35.5 billion. | |
It is meant both to give G.E. a significant stake in the oil business, especially if oil prices recover, while providing Baker Hughes shareholders with stock in a bigger, healthier company and a hefty cash dividend. | |
“There was an unbelievable industrial logic,” Mr. Immelt said in an interview. “When we look back, both investor groups got something.” | |
Still, shares of Baker Hughes fell 6.3 percent on Monday, while G.E. shares slipped 0.4 percent. | |
The deal takes place against the backdrop of the continued struggles in the oil industry. The slide in oil and natural gas prices forced exploration and production companies to decommission two-thirds of their drilling rigs, which the service companies operate along with hydraulic fracturing, piping, trucking, water, electrical and environmental operations. Schlumberger and Halliburton together have laid off a total of 85,000 workers since late 2014. | |
While companies are now slowly deploying more rigs, as the price of oil has stabilized in recent months, technological improvements and economic necessity have made operations more efficient, driving down costs and the period of time necessary to drill a well. That may hurt the revenues of service companies in the future, along with tightening regulations and heightened environmental activism over rising concerns about climate change. | |
More than 100 North American service companies have filed for bankruptcy over the last two years as the price of oil plummeted to under $50 a barrel from over $100 a barrel. In the last six months, 48 service companies have filed for bankruptcy, according to the Dallas law firm Haynes and Boone, including such industry leaders as Key Energy Services, Basic Energy Services and C&J Energy Services. | |
“The margins for services have been razor thin and in some cases nonexistent,” said Jonathan Garrett, principal analyst at the consulting firm Wood Mackenzie. “But when you have companies of this size get together, there is a lot you can do with respect to cost reductions, and even in a more modest growth scenario begin to improve those margins.” | |
In recent weeks, oil prices had strengthened on expectations that OPEC would either freeze or cut production when cartel members meet in late November. But prices fell on Monday after a meeting in Vienna on Saturday between OPEC countries and several outside producers, including Russia, Mexico and Brazil, failed to come up with an agreement to cooperate. | |
The troubles in the oil market weighed on Baker Hughes’s effort to merge with Halliburton, a deal that was announced in late 2014. As the two companies attempted to win the approval of antitrust regulators, they held discussions about potentially selling assets to G.E. | |
After the Halliburton proposal fell apart this past spring, G.E. and Baker Hughes kept talking. G.E., which first entered the energy business two decades ago and built its operations in part through acquisitions, sought to bulk up what has been a relatively small division compared with Schlumberger, Baker Hughes or Halliburton. | |
The industrial colossus wanted to retain a stake in the business. And so in meetings arranged on two continents — from Florence, Italy, to Houston to G.E.’s campus in Crotonville, N.Y. — Mr. Immelt and a Baker Hughes team led by its chief executive, Martin Craighead, and the company’s chief financial officer, Kimberly A. Ross, hammered out what became an unusual deal. | |
Under the terms of the transaction, General Electric will fuse its oil and gas — and provide $7.4 billion in cash — with Baker Hughes, creating a new publicly traded partnership. G.E. would own 62.5 percent of the new company, while Baker Hughes shareholders would own 37.5 percent and receive a special dividend of $17.50 a share financed by the new cash. | |
One potential issue hanging over the transaction is whether government regulators will approve the deal, since they blocked the merger of Halliburton and Baker Hughes. | |
Executives at both companies maintain that G.E.’s move will not pose an antitrust issue, since the two businesses share little overlap. | |
“We’ve turned the page on that in so many ways,” Mr. Craighead said of the Halliburton deal. | |
Still, the companies said that they would be willing to sell off assets to assuage regulators’ concerns, with an eye on completing the union by the middle of next year. | |
Combining the two businesses is expected to add to G.E.’s 2018 earnings by about 4 cents a share, while yielding an estimated $1.6 billion in cost savings by 2020. | |
Lorenzo Simonelli, the head of G.E.’s energy business, said the cost savings alone justify the merger, even if oil prices do not climb into triple digits again anytime soon. | |
Mr. Craighead added: “I’d say the genius of this transaction is that, in its framework, it takes the timing risk off the table. No one knows where oil prices are going.” | |
Leading the business — referred to by the companies as the new Baker Hughes — will be Mr. Simonelli. Mr. Immelt will be chairman of the enlarged company’s board and Mr. Craighead will be vice chairman. | |
The new company will maintain dual headquarters in Houston and in London, the existing home of G.E.’s oil and gas business. | |
G.E. also said on Monday that it planned to sell its water business, which includes water treatment equipment. | |
G.E. took advice from Centerview Partners and Morgan Stanley, and legal counsel from Shearman & Sterling. Baker Hughes relied upon Goldman Sachs and the law firm Davis Polk & Wardwell. |