Monday 31 October 2016

US engineering giant GE and Baker Hughes are merging to form a new Baker Hughes company that will be majority owned by GE Oil & Gas.

The new outfit will be a "world-leading oilfield technology provider" with dual headquarters in Houston and London, with key management figures from both companies retained.

"The 'new' Baker Hughes will be a leading equipment, technology and services provider in the oil and gas industry, with $32 billion of combined revenue and operations in more than 120 countries," a joint statement read on Monday.

"By drawing from GE technology expertise and Baker Hughes capabilities in oilfield services, the new company will provide best-in-class physical and digital technology solutions for customer productivity."

GE will own 62.5% in the new company, with Baker Hughes holding the balance of 37.5%. The former is also to contribute $7.4 billion to fund the $17.50 special dividend to existing Baker Hughes shareholders.

GE Oil & Gas chief executive Lorenzo Simonelli is to be the chief executive and president of the new entity, with Baker Hughes counterpart Martin Craighead taking on the role of vice chairman. Jeff Immelt, chairman and chief executive of the GE group, will become chairman of the new company.

Inclusive of Immelt and Craighead, the new board will have nine directors - five from GE and four from Baker Hughes.

Already the partners have set their sights on cost cuts, with $1.6 billion of "runrate synergies" - primarily to be achieved through cost cuttings, but also through growth amid an expected oil market rebound - by 2020.

The companies are targeting mid-2017 for closing of the deal. However, it is subject to approval by Baker Hughes shareholders, regulatory approval and other closing conditions.

A lack of regulatory approvals is what put paid to an earlier attempt by US oilfield services giant Halliburton to merge with Baker Hughes. US and other regulatory authorities are likely to similarly scrutinise this deal, although there is unlikely to be the same level of business overlaps as were seized upon by US authorities to ultimately sink the Halliburton deal.

Immelt commented: "This transaction creates an industry leader, one that is ideally positioned to grow in any market. Oil & gas customers demand more productive solutions. This can only be achieved through technical innovation and service execution, the hallmarks of GE and Baker Hughes."

Craighead added: "This compelling combination brings together best-in-class oilfield equipment manufacturing and services, and digital technology offerings for the benefit of all customers and stakeholders.

"The combination of our complementary assets will create a platform capable of seamless integration while we enhance our ability to deliver optimised and integrated solutions and increase touch points with our customers."

Philip Barker, partner and head of industrials at Cavendish Corporate Finance, wrote in an analyst note on Monday morning:"The proposed $30 billion merger between GE. (They) will create an energy powerhouse yielding more than $25 billion in revenue and will enable the enlarged group to better compete with oilfield services leader Schlumberger.

"We expect that GE will gain from an anticipated oil market recovery without having to acquire Baker Hughes, which in turn will benefit from GE’s big data capabilities and help it raise sales of its current platform while the enlarged group will be able to capitalise on a larger distribution network.

"The oil and gas industry is showing signs of recovery, with barrel prices rebounding to $50 a barrel, but this deal still demonstrates a strong imperative for consolidation amongst businesses in the oil and gas industries, with GE cutting more than $1 billion in costs out of the company in a drive for a leaner and more resilient company."

Reports surfaced last Thursday that a deal was in the offing, with GE moved to deny a report from the Wall Street Journal that it was looking at a takeover of Baker Hughes. It did, however, say the pair were discussing various combinations.

However, a merger looks all-but imminent as the pair lined up a a joint investor webcast for Monday morning US time.