November 13, 2018

GE to raise $4 billion by selling chunk of Baker Hughes

General Electric is speeding up a plan to divorce itself from oil-and-gas giant Baker Hughes.

GE (GE), which has been racing to repair a bloated balance sheet, announced a complex agreement on Tuesday to unload up to 166 million shares in oilfield services firm Baker Hughes (BHGE). The transactions would raise about $4 billion at current prices.

The timing of the deal shows how bad the debt-riddled conglomerate needs the cash. GE only completed its takeover of Baker Hughes in July 2017. Yet by June 2018, GE said it would eventually get rid of its 62.5% stake.

GE had to reach an agreement to escape a lock-up period that prevented the company from exiting the Baker Hughes investment until July 2019.

New GE CEO Larry Culp, who took over on October 1, is under immense pressure to bolster the company's balance sheet by rapidly selling off businesses. Panicked investors have sent GE stock plunging 53% this year, on track for its worst year since 2008. GE shares rose about 2% on Tuesday in volatile trading.

Culp vowed on Monday to move with a "sense of urgency" to get GE's debt problem under control. "We do have a lot of leverage," Culp told CNBC. "We have a number of options to bring that leverage down over time."

In a statement on Tuesday, Culp said the Baker Hughes agreements "accelerate" the company's plan to pursue an orderly separation from Baker Hughes. GE has said the process could take several years to complete.

Buying high, selling low

GE accumulated a mountain of debt partly because of a series of poorly timed deals. For instance, GE's 2015 purchase of Alstom's power business turned out to be a disaster, plunging the company deeper into fossil fuels just as renewable energy began stealing market share.

The Baker Hughes sale may not help GE's reputation for buying high and selling low. Consider that Baker Hughes was trading at around $38 when GE, under former CEO Jeff Immelt, agreed to merge its oil and gas business with the oilfield services company. Today, Baker Hughes is trading at around $24.

The oil world has suffered through an historically bad month. Fears about oversupply sent crude crashing into a bear market last week. US oil prices have declined 11 consecutive days, the longest losing streak since futures trading began in 1983. That's bad news for oilfield services firms like Baker Hughes, which sell tools and technology used by oil and gas exploration and drilling companies.

John Inch, analyst at Gordon Haskett, described GE's Baker Hughes agreement as a "fire sale."

"We believe the move highlights how liquidity issues remain on the front burner for GE," Inch wrote to clients on Tuesday, "despite company and analyst assurances to the contrary."

Under the deal announced on Tuesday, GE and Baker Hughes signed a series of long-term commercial agreements that would have expired with the lockup in 2019. Those agreements include the creation of a joint venture and a deal for Baker Hughes to buy GE's gas turbine technology at current pricing.

The transactions call for GE to sell up to 101 million shares of Baker Hughes. Baker Hughes has agreed to repurchase about 65 million of its shares from GE.

These sales are expected to keep GE's stake in Baker Hughes just above 50% for now. The remaining stake will be subject to a 180-day lock-up period that prevents further sales unless the underwriting banks consent.

Additionally, GE said it will transfer certain UK pension liabilities to Baker Hughes, but none of GE's primary US pension plan will be included. GE has one of the highest pension deficits in the S&P 500 due to years of inattention and extremely low interest rates.

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