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General Electric Pursues Deal With Baker Hughes

October 28, 2016/ 08:15

Washington. General Electric Co. is in talks to merge its oil-and-gas business with Baker Hughes Inc., according to people familiar with the matter, a transaction that would dramatically reshape the industrial giant.

GE has approached the oil-field-services company about a deal, the people said, but details of the talks couldn’t be learned and they could break down before an agreement is reached.

A deal—which could be worth upward of $20 billion—could be structured such that GE combines the businesses and spins them into a new publicly traded company, information published The Wall Street Journal. Such a transaction would help the maker of jet engines and locomotives distance itself from the battered energy industry.

“We are in discussion with Baker Hughes on potential partnerships,” a GE spokeswoman said after The Wall Street Journal reported that GE was in talks to buy Baker Hughes. “While nothing is concluded, none of these options include an outright purchase,” she added. Baker Hughes declined to comment.

Houston-based Baker Hughes, which had a market value of $23 billion at Thursday’s close, had revenue of $15.7 billion last year. GE, which had a market value of $259 billion, had $16.5 billion in revenue from its oil-and-gas business last year.

Baker Hughes shares closed Thursday at $54.55 and rose 7% after hours, after the Journal reported on the talks.

In 2014, Baker Hughes agreed to sell itself to rival Halliburton Co. for $35 billion, or $78.62 a share. Earlier this year, the Justice Department filed a lawsuit to block the proposed merger, and the deal fell apart.

Baker Hughes is one of the largest oil-field-services companies in the world by revenue. Such companies help energy producers, from Texas wildcatters to national oil companies, find and extract oil-and-gas deposits by selling them equipment, renting tools, supplying labor and building worker camps in far-flung drilling fields—all of which have helped power the U.S. drilling boom.

Before Baker Hughes and Halliburton had to abandon their merger earlier this year, the companies held talks with GE to sell a package of assets valued at more than $7 billion to help win regulatory approval, people familiar with the matter have said.

A combination with Baker Hughes, which could be among GE Chief Executive Jeff Immelt’s biggest deals, could also be used as a vehicle to separate GE’s other businesses from one that has been dragging down its results in recent years. 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 oil-and-gas acquisitions 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 Ltd.

But some, like Trian Fund Management LP, the activist investor that took a $2.5 billion stake in GE last year, have publicly urged the company to focus on buying back its own shares and pivoting back toward three industrial sectors: power turbines, jet engines and medical scanners.

When Trian announced its GE investment, it said the company “must be more disciplined” in its deal making and called GE’s record of more than $30 billion in acquisitions over the previous five years “mixed.”

Trian praised GE for its 2015 decision to exit from most of its financial-services business and said the company could drive up its share price by cutting costs, improving profit margins and borrowing roughly $20 billion to buy back shares. It said GE needed to commit to acquisitions that paid off better than buying back the stock.

In recent months, GE has suggested additional debt was likely to be used for acquisitions. Its shares have done little in the past year 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.

Earlier this week, Baker Hughes said its third-quarter loss widened on charges related to its cost-cutting efforts. Its revenue was hurt by continued weak demand and pricing pressures.

Boston-based GE, which makes a range of industrial equipment from jet engines to MRI machines, also produces heavy equipment like blowout preventers, pumps and compressors used in petroleum exploration and production. The company is under increasing pressure to show that its 2015 pivot away from financial services and its renewed focus on industrial businesses is yielding benefits for investors.

In the fall of 2014, GE assured investors that its assumptions of growth were based on oil prices at around $100 a barrel—just in time for the bottom to fall out of the crude market, triggering cutbacks in capital spending that have hammered GE’s sales and profits. Earlier this month, GE cut its full-year sales forecast after reporting declining third-quarter orders in the segment.

GE predicts operating profit in the oil-and-gas unit will be down by 30% for the year, and is cutting more than $1 billion in costs out of the company over two years. There are “incremental cost actions” still to be made in the business in 2017, Chief Financial OfficerJeffrey Bornstein said last week on GE’s third-quarter earnings call. But he agreed with a stock analyst who suggested that the oil business could be running low on areas to cut costs as it tries to return to profitability.

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