(Bloomberg) — General Electric Co. is creating a $32 billion oil business by combining its petroleum-related operations with Baker Hughes Inc., betting on a rebound for an industry mired by a historic slump in crude prices.
The new company will be one of the industry’s largest players, bringing together a portfolio of capabilities spanning oilfield services, equipment manufacturing and technology. GE will own 62.5% of the merged entity, which will be publicly traded, the companies said Monday. The deal is expected to close in the middle of next year.
“It’s got a diversified portfolio that can weather the cycles better than anybody,” GE Chief Executive Officer Jeffrey Immelt said in a telephone interview.
Creating a partnership lets GE deepen its bet on oil and prepare for a possible rebound without absorbing all of Baker Hughes, which was the target in a failed acquisition this year by Halliburton Co. The arrangement also enables Immelt to keep expanding after billions in deals to gobble up other equipment and service companies, including Lufkin Industries Inc. and Dresser Inc.
“The new entity will be capable of providing end-to-end oilfield equipment, technology and services solutions at scale,” Nicholas Heymann, an analyst with William Blair & Co., said in a note to clients.
The transaction is subject to approval by regulators and Baker Hughes shareholders, as well as other customary closing conditions. GE will contribute $7.4 billion to fund a special dividend of $17.50 a share to Baker Hughes stockholders.
GE rose 0.9% to $29.49 at 10:26 a.m. in New York, while Baker Hughes fell 0.5% to $58.82. GE had fallen 6.2% this year through Friday, compared with a 4% gain in the Standard & Poor’s 500 Index. Baker Hughes rose 28% over the same period.
Lorenzo Simonelli, CEO of GE Oil & Gas, will serve in the same role at the “new Baker Hughes,” while Immelt will be chairman and Baker Hughes CEO Martin Craighead will be vice chairman, according to the statement. The company will have dual headquarters in Houston and London.
The transaction will add 4 cents a share to GE’s earnings in 2018 and 8 cents by 2020, GE said. The company anticipates “runrate synergies,” or savings through cost cuts, of $1.6 billion by 2020.
The new company has growth opportunities including through increased adoption of new technology such as GE’s Predix operating system, Immelt said.
Moody’s Investors Service, S&P Global Ratings and Fitch Ratings affirmed GE’s credit level following the announcement and said the outlook is stable.
“Fitch expects global exploration and production spending and activity to increase moderately in 2017 with a more robust growth profile in 2018,” the ratings company said in a statement.
By joining forces, Baker Hughes and GE are betting they can compete more effectively with the world’s top oilfield-services provider, Schlumberger Ltd., which recently bought equipment-maker Cameron International. Oilfield contractors are increasingly forming partnerships to help cut costs and expand their offerings and distribution channels amid the downturn. The moves have come into favor as customers seek ways to improve efficiency and get greater value out of the services and gear needed to suck crude out of the ground.
“Importantly, the resulting company will be far more resilient and cycle-resistant,” Craighead said on the call.
GE has expanded its oil and gas business in recent years through more than $10 billion in acquisitions, making it the company’s fourth-largest division. Yet, within the world of oilfield services and equipment manufacturing, Boston-based GE ranked 11th, according to April data from Spears & Associates.
Sales in GE’s oil and gas unit fell 25% in the third quarter, the biggest decline among the company’s industrial units.
“We still think this is a core GE business,” Immelt said on a conference call this month. Executives have said the company, which may add as much as $20 billion of new debt to support growth efforts, is open to deals and would like to be opportunistic during the oil market slump.
“This is the right time in the cycle to invest,” Immelt said Monday. “This was a unique opportunity. We wanted to grab it.”
Baker Hughes terminated plans to be acquired by Halliburton earlier this year after failing to win antitrust approval from regulators. The GE deal isn’t likely to face the same hurdles in that regard, said Jennifer Rie, an analyst with Bloomberg Intelligence.
“The companies have far fewer overlaps and are primarily complementary,” she said in an e-mail. “The deal would create a stronger player in a concentrated industry, which is pro-competitive and has a better chance of clearance than the failed Halliburton deal.”
The oil-services and equipment sectors have been among the hardest hit in the industry’s two-year downturn, contributing the largest chunk of the more than 350,000 jobs slashed globally.
At least 100 North American oilfield-service companies have gone bankrupt in 2015 and 2016 as energy prices slid, according to a tally by law firm Haynes & Boone. Exploration customers were forced to cut an unprecedented amount of spending over the past two years to cope with the oil industry’s worst financial crisis in a generation.
Nabors Industries Ltd. on Monday announced plans to form a joint venture with Saudi Aramco to own, manage and operate onshore drilling rigs, a move mirroring efforts across the industry to use partnerships to better manage operations through the downturn. GE earlier this year entered into cooperation agreements in other areas with National Oilwell Varco Inc. and Diamond Offshore Drilling Inc.
Centerview Partners and Morgan Stanley served as financial advisers to GE on the deal with Baker Hughes, while Shearman & Sterling provided legal advice. Goldman Sachs Group Inc. advised Baker Hughes on financial matters and Davis Polk was the company’s legal adviser.
Bloomberg News by Richard Clough