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Energetic portfolio

31 Oct 2016 By Rob Cox

General Electric is taking its motto “imagination at work” to heart. The deal it has just cooked up with Baker Hughes, an oilfield-services rival, sets an intriguing precedent for the $267 billion industrial behemoth. The finances of the arrangement may stack up for shareholders, too. But what could set this transaction apart is GE’s implicit recognition that the sum of its many parts may be more valuable than the whole.

In merging its oil and gas unit with $27 billion Baker Hughes, GE accomplishes a few worthy objectives. It expands its footprint in an industry still coping with the ructions of the oil-patch bust and the prospect of relatively low energy prices for years to come. The new Baker Hughes should rank as one of the top three providers of services to wildcatters.

By crunching the division led by Lorenzo Simonelli into Baker Hughes, GE ring-fences its exposure to this volatile business while nabbing a 62.5 percent interest in the public rump. By GE’s own arithmetic, the deal’s $1.6 billion of promised synergies – a quarter of them from enhanced revenue – are worth $14 billion today. GE’s share would come to $8.75 billion, covering the $7.4 billion it’s paying as a dividend to Baker Hughes owners.

Maintaining its oil and gas business as a publicly traded company also provides an acquisition currency to pursue other transactions in the sector, though executives said reaping synergies remains the first order of business. GE also has the option of spinning out the entire business to its own shareholders.

The deal also creates a transparent mechanism for valuing a key part of GE’s portfolio. That represents a break from the existing GE order. The conglomerate run by Jeff Immelt was swift to enumerate the benefits that will accrue from the new Baker Hughes’ association with the parent – including what it calls the GE Store and its industrial internet platform, Predix. If the oil and gas business can be more efficiently separated, though, why not other businesses like power, renewable energy, aviation, healthcare or transportation?

There may be specific reasons why Baker Hughes makes more sense as a controlled subsidiary, such as tax issues or the volatility of the business. But it creates a precedent that imaginative shareholders will industriously apply to other parts of the GE empire.


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