GE GE Aerospace

By Ted Mann and Anne Steele 

Baker Hughes Inc. on Friday confirmed that it is in discussions with General Electric Co., a day after The Wall Street Journal reported the companies were in talks about a potential transaction.

In an email to employees, CEO Martin Craighead wrote, "I want to clarify that while we have been in discussions with GE, nothing is concluded and there is no guarantee anything will be concluded." He wasn't more specific about the discussions. A copy of the message was filed Friday with securities regulators.

Shares of the two companies rallied Friday. GE's shares gained 2.3% to $29.28 in afternoon trading, while Baker Hughes shot up 8.5% to $59.19.

GE has approached the oil-field-services company about a merger with GE's oil and gas business, people familiar with the matter said. Details of the talks couldn't be learned, and the talks could break down before an agreement is reached.

A GE spokeswoman said Thursday that the company was pursuing "potential partnerships" with Baker Hughes, but that GE wasn't exploring an "outright purchase." GE declined further comment Friday.

The public statements have left Wall Street confused and analysts contemplating various options available to GE. A combination could create a company with more than $25 billion in revenue that would compete with rivals like Schlumberger Ltd. to provide equipment and services to oil rigs and wells.

"Our first reaction is, 'What is a partnership?'" wrote analysts for Credit Suisse. "Combining product lines or services makes sense, but that is a 'joint venture,' not really a partnership."

A partnership could be "very important strategically" for the two companies, said Steven Winoker, an analyst at Sanford Bernstein & Co., in a note to investors. Mr. Winoker also suggested GE could leave itself an option to buy Baker Hughes down the line.

One possibility would be for GE to merge its $16.5 billion oil-and-gas unit with Baker Hughes, and the combined business would then be spun off into a stand-alone public company, jointly owned by the two companies' shareholders. Such a transaction, called a Reverse Morris Trust, would enable GE to avoid a hefty tax bill and allow the company's shareholders to reap any cost-savings or other benefits from putting the two businesses together -- as well as any upside from a rebound in oil prices.

After two brutal years in the energy industry, GE and some of its rivals have begun to see signs of hope in the oil-and-gas business.

Honeywell International Inc. CEO Dave Cote told investors earlier this month that the company believes a recovery in the energy industry is coming next year. "It won't be a V-shaped recovery as we go into '17, but this is clearly the bottom, and you're starting to see the improvement of that in the fourth quarter and with the orders that we're already getting."

Just last week, GE also provided glimmers of improvement 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 says operating profit in the 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 Officer Jeffrey 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.

"We think Oil & Gas is going to continue, as you look forward, to be a drag," CEO Jeff Immelt said on last week's call. "Our team is doing a really good job. We're executing well. We're taking costs out. But we're not really forecasting a hockey stick in Oil & Gas."

Write to Ted Mann at ted.mann@wsj.com and Anne Steele at Anne.Steele@wsj.com

(END) Dow Jones Newswires

October 28, 2016 16:10 ET (20:10 GMT)

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