In retrospect, General Electric Company‘s (NYSE:GE) purchase of Baker Hughes Incorporated (NYSE:BHI) is as much of a spinoff as it is a merger. That is, rather than simply acquiring BHI, GE is folding its struggling energy division and Baker Hughes into a completely new company, shedding what had become a persistent headache and simultaneously creating a soup-to-nuts oil and gas outfit.
This new multifaceted organization has a better shot at success than either entity had before, simply because it brings a more integrated customer-solution to the table.
GE is still going to own nearly two-thirds of the new entity, so it’s not as if owners of GE stock are off the hook should the tepid recovery effort in oil prices peter out.
General Electric Pulls the Trigger
It certainly didn’t take long for the rumor to become a reality. The prospect that General Electric was interested in acquiring oilfield services name Baker Hughes first surfaced on Tuesday of last week. That whisper pushed BHI shares up a healthy 4%, but BHI profit-takers shaved 2.5% off the stock price Monday afternoon. Still, Baker Hughes shares have gained 10%-plus in just one week’s time. Not too shabby.
That advance brings the value of Baker Hughes to roughly $26 billion, and and will end up not only swapping out BHI shares for those of the yet-to-be-named company, but also culminate in a one-time special dividend of $17.50 per share of BHI.
The acquisition/spinoff was likely a welcome surprise for most Baker Hughes shareholders. The company and Halliburton Company (NYSE:HAL) were intending to merge in 2015 following a late-2014 announcement, but an antitrust headwind ultimately quelled that deal.
The GE deal shouldn’t face quite the same hurdle, primarily because the number of large companies within the oil services sector isn’t changing, and General Electric and Baker Hughes weren’t head-to-head competitors anyway. GE’s oil and gas division primarily offers production systems, rig equipment and artificial lift technology. Baker Hughes mostly offers drilling and consultation/evaluation services.
The Deal’s Details
When all’s said and done, the new company is expected to initially drive anywhere between $23 billion and $32 billion in annual revenue. It’s the price of oil, however, that will ultimately dictate how much revenue the combined organizations can generate.
General Electric has already come up with a specific outlook, though. The acquisition is expected to add four cents per share to the bottom line in 2018, which would be the first full year of merged operations. By 2020, the upside should be an additional eight cents per share of GE stock.
For perspective, analysts expect General Electric to post earnings of $1.49 per share this year, and $1.67 next year.
Whatever top line and bottom line change is in the cards, it would be created under the leadership of Lorenzo Simonelli, who currently holds the title of President and CEO of GE Oil & Gas. Current General Electric CEO Jeff Immelt will be chairman of the new company, with current Baker Hughes chief Martin Craighead expected to be named as vice chairman.
The pairing should be completed sometime in the middle of 2017.
What This Means for GE Stock
The acquisition is lauded for its capacity to put General Electric much deeper into the oilfield services arena and make it a top-three player in that space (size and scale are everything in the business).
But it’s not just the clout and backing that should have rivals like Halliburton worried and GE owners excited … It’s the potential for digitally driven improvements to the oilfield services business that General Electric could support. That’s the game changer here.
While GE has been cultivating a corporate paradigm shift that makes it first and foremost a software company that just so happens to make the equipment managed by its platform, that know-how can and will bring a new dimension to the way oil wells are managed. As MercBloc’s Dan Dicker explained it this morning on Bloomberg:
“This is a bet, again, for GE to get into the oil services game, buy what is a down and dirty oil services company … Baker Hughes is that old-school kind of cementing, pipes, plumbing kind of thing. GE, on the other side, [is] very much that type of digital, that new seismic imaging kind of routine … how you do spacing and frac wells and so forth. Together they make for a heck of an organization.”
Still, few deny that for this pairing to work out well, oil prices need to keep rising. That remains something of a question mark. The U.S. Energy Information Administration still only sees an average price of $51 per barrel of brent crude for 2017, up modestly from 2016’s likely average price of $43.
That’s going to keep the efficiency pressure on this new partnership … for only (hopefully) an extra eight cents per share per year within four years. That doesn’t exactly, suddenly make GE stock a screaming buy.
As of this writing, James Brumley did not hold a position in any of the aforementioned securities.