General Electric Co. reached a deal to combine its oil-and-gas business with Baker Hughes Inc., creating a publicly traded energy powerhouse that would give GE a cost-effective way to play any recovery in the industry.
GE will contribute its oil-and-gas business and $7.4 billion through a special one-time cash dividend of $17.50 for each Baker Hughes share. The new company will be publicly traded on the New York Stock Exchange and will be 62.5% owned by GE and 37.5% owned by Baker Hughes shareholders.
The wall street Journal reported last week that the companies were in talks about a potential transaction.
A combination creates a company with more than $32 billion in revenue that could cut costs to better compete with rivals such as Schlumberger Ltd. to provide equipment and services to oil rigs and wells. It would enable GE to benefit from an expected recovery in the industry without having to pay for a full acquisition of Baker Hughes. It would also enable the companies and their shareholders to benefit from savings and other synergies from putting the two businesses together.
After two brutal years for the oil-and-gas business, GE and some of its rivals in the industry have begun to see signs of hope. Crude prices, which plunged to $30 a barrel this year from more than $100 in 2014, have rebounded to around $50 recently.
GE expects the deal to add about 4 cents to its earnings per share in 2018 and 8 cents by 2020.
Lorenzo Simonelli, chief executive of GE Oil & Gas, will be chief executive of the new company and GE Chief Executive and Chairman Jeff Immelt will be its chairman. Baker Hughes Chairman and Chief Executive Martin Craighead will serve as vice chairman. The board of the new company will consist of five directors appointed by GE and four appointed by Baker Hughes.
GE shares rose 1.1% to $29.57 in morning trading in New York as Baker Hughes shares increased 0.2% to $59.22.
GE provided glimmers of improvement in the energy sector from the third quarter, noting that U.S. rig and well counts remained down 50% from the previous year but had ticked upward in the previous three months. Still, orders for services were down across all of GE's oil business, the company said.
In recent public comments, GE has said it is still committed to the oil and gas unit for the long term, but GE said operating profit in the unit will be down by 30% for the year. GE is cutting more than $1 billion in costs out of the company over two years.
The announced deal comes in what has already been a strong year for mergers and acquisitions. Such strength defies conventional wisdom, coming less than two weeks before the presidential election. The fact that companies are inking mergers at a breakneck pace ,without knowing who the next president will be, shows how strong the imperative to consolidate across industries is, bankers say.
There is no guarantee a GE-Baker Hughes deal will be completed. The last merger agreement Baker Hughes entered into—a $35 billion proposed union with Halliburton Co.—was rejected by antitrust regulators this year amid a tough environment for deals in Washington.
Before Baker Hughes and Halliburton had to abandon their merger plans, the companies held talks with GE to sell a package of assets valued at more than $7 billion to help win regulatory approval.
A combination with Baker Hughes would be among GE Chief Executive Jeff Immelt's biggest deals. The company has done more than $14 billion of acquisitions since 2007 to build its oil-and-gas business.
Mr. Immelt has pledged to be opportunistic about acquisitions in the segment and predicted that GE would exit from the oil downturn with a lean organization and a strong position against competitors such as National Oilwell Varco Inc. and schlumberger.
Activist Trian Fund management LP last year took a $2.5 billion stake in GE and has said the company must be more “disciplined” in its deal making. GE shares had done little since then and are still well below their high of more than a decade ago.
Baker Hughes has its own activist holder. ValueAct Capital Management LP purchased a stake after the Halliburton deal was announced that is now at 7%. ValueAct had suggested Baker Hughes could sell at least some of its businesses.