By Dana Mattioli, Kate Linebaugh and Joann S. Lublin and David Benoit
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. 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 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.
--Ted Mann contributed to this article.
Write to Dana Mattioli at dana.mattioli@wsj.com, Kate Linebaugh
at kate.linebaugh@wsj.com, Joann S. Lublin at joann.lublin@wsj.com
and David Benoit at david.benoit@wsj.com
(END) Dow Jones Newswires
October 27, 2016 22:31 ET (02:31 GMT)
Copyright (c) 2016 Dow Jones & Company, Inc.
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