By Ted Mann
Jeff Immelt steered General Electric Co. out of the financial
crisis and straight into the depths of a global oil rout. Now, GE's
chief executive is expanding his wager on the battered energy
business through a combination that unloads much of the risk onto
shareholders of a proposed new company.
He is casting GE's planned merger of its oil and gas unit with
Baker Hughes Inc. as an opportunistic bet on an oil-and-gas
industry recovery, dismissing the idea that the deal would shrink
GE's industrial reach by spinning off assets. His plan calls for
the resulting company, with $32 billion in annual revenue, to keep
the Baker Hughes name, be led by GE executives, and trade on the
New York Stock Exchange.
"I look at this as a strengthening, not a separation," insisted
Mr. Immelt, who would become chairman of the newly formed company.
"I think this is a unique transaction, but not one that necessarily
needs to be applied elsewhere."
The deal marks a shift for the 60-year-old executive who
transformed GE into a key player in the energy industry by weaving
together some $14 billion in oil and gas equipment acquisitions
over nearly a decade. But many of those deals were struck when oil
prices were closer to $100 a barrel, not $50.
General Electric will own two-thirds of the new Baker Hughes,
include its results in GE's financial reports while paying Baker
Hughes shareholders a $7.4 billion cash dividend. GE Oil & Gas
chief Lorenzo Simonelli will serve as CEO of the combined company,
which will have about 70,000 workers.
Even as the Boston-based GE promoted its oil-and-gas business's
greater scale, it acknowledged the merged operations give its
executives new opportunities for cost-cutting. GE said on Monday
that it already has targeted $1.2 billion in cost-cuts through 2020
in the combined operations.
And it wasn't clear how long GE would hold on to its majority
interest in the unit. "The structure as you see it today does not
preclude doing a spin or split in the future on a tax-free basis,"
GE finance chief Jeffrey Bornstein said on Monday.
The oil industry foray, which accelerated with the boom in shale
production, initially offered Mr. Immelt a growth business to
counter uncertain and often sluggish global growth in its other
operations. In an investor meeting in September 2014, GE said its
growth projections for the business were based on an assumption of
oil prices at roughly $100 a barrel.
Then oil and gas prices cratered. GE has suffered over the past
two years as oil exploration and production firms curbed big
projects or sought to renegotiate orders.
Annual sales in the business fell 14% last year, to $16.45
billion. GE told investors earlier this month that it anticipated
operating profit in the oil unit would drop 30% compared with last
year, and the company has continued with an aggressive cost-cutting
effort.
Mr. Immelt has garnered credit from investors for his moves to
shift GE away from financial services through selling off much of
its GE Capital lending arm. But after 15 years at the helm, Mr.
Immelt also has shown a willingness to part ways with key
industrial business lines.
Those include venerable segments like GE's appliance business,
sold to China's Haier Group earlier this year for $5.4 billion, or
GE Plastics, which he unloaded for $11.6 billion in 2007. In 2013,
he sold GE's remaining 49% stake in its NBCUniversal joint venture
for $16.7 billion to Comcast Corp.
The Baker Hughes acquisition provides a chance to "complete the
business strategically," Mr. Immelt told investors on a conference
call on Monday. GE executives said they expected a slow recovery in
energy prices, with crude selling for between $45 and $60 a barrel
through 2019.
GE's strategy in the oil business wasn't about timing price
spikes in crude, Mr. Immelt said, but about developing advanced
equipment for an industry that was "going to become more
technically sophisticated as time went on."
"That is what we've been betting on all along," Mr. Immelt said,
"it just made all kinds of sense for investors of both companies
and our customers to grab it."
The new company will be "far more resilient and cycle
resistant," Baker Hughes CEO Martin Craighead said on Monday's call
with investors. Baker Hughes earlier had tried to sell itself to
rival Halliburton Co., a deal that fell apart in May over antitrust
objections.
GE shares slipped a fraction to $29.10 at 4 p.m. in Monday New
York trading, while Baker Hughes fell 6.3% to $55.40.
"Trian believes the combination has strong industrial logic,"
said a spokeswoman for activist investor Trian Fund Management LP,
which took a $2.5 billion stake in GE last year. "Trian also
applauds GE for structuring an attractive transaction that should
crystallize a superior valuation multiple for GE's Oil and Gas
assets."
GE and Baker Hughes executives said the deal would provide GE
and the merged company with between $800 million and $1 billion in
tax benefits over time, derived from tax-loss carry forwards that
Baker Hughes likely would have been unable to use. It will have
headquarters in London and Houston.
Its controlling stake in the new Baker Hughes will position GE
to reap the rewards if the oil and gas business rebounds, the
company said.
The deal is "positive strategically" for GE shareholders, said
Steven Winoker, an analyst at Sanford Bernstein & Co., in a
note to investors. "This Baker deal is also an attractive structure
for GE: without requiring a full cash outlay for Baker Hughes, the
'New' Baker provides GE shareholders with additional upside to an
oil price recovery," he wrote.
--David Benoit contributed to this article.
Write to Ted Mann at ted.mann@wsj.com
(END) Dow Jones Newswires
October 31, 2016 19:12 ET (23:12 GMT)
Copyright (c) 2016 Dow Jones & Company, Inc.
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