General Electric Co said on Monday it would merge its oil and gas business with Baker Hughes Inc, creating the world's second-largest oilfield services provider as competition heats up to supply more-efficient products and services to the energy industry after several years of low crude prices.
The deal to create a company with $32 billion in annual revenue will combine GE's strengths in making equipment long-prized by oil producers with Baker Hughes's expertise in drilling and fracking new wells.
Shares of Baker Hughes were down nearly 7 percent, a drop that executives said likely was due to the deal's complicated structure.
"This is a good deal for all of the investors," said Lorenzo Simonelli, head of GE's oil and gas business who will lead the new entity, to be called "Baker Hughes, a GE company."
GE is already the world's largest oilfield equipment maker, supplying blowout preventers, pumps and compressors used in exploration and production. GE also has invested heavily in large data processing services just as the oil industry eyes its potential to boost oil recovery.
Baker Hughes, by contrast, is seen as one of the world leaders in horizontal drilling, chemicals used to frack and other services key to oil production.
The new company will vault Baker Hughes's market share ahead of rival Halliburton Co, which tried and failed to buy Baker until the deal collapsed last May, and also compete heavily with Schlumberger NV, the world's largest oilfield service provider, for customers.
Simonelli called Baker CEO Martin Craighead after the Halliburton deal collapsed, seeking some kind of business combination, with negotiations evolving over time to Monday's announcement.
"Neither Lorenzo (Simonelli) or I needed to do this. We both followed our fiduciary responsibility," Craighead said in an interview.
GE will own 62.5 percent of the new publicly-traded company. The deal is expected to close in mid-2017.
GE will have to pay $1.3 billion to Baker Hughes if the deal does collapse in what would be yet another windfall for Baker Hughes after Halliburton was forced to pay it $3.5 billion earlier this year when those companies' merger collapsed.
"We don't anticipate anything like what we've encountered before happening again," Craighead said, stressing he expects the GE tie-up to be blessed by regulators.
GE and Baker Hughes will reach out to the Justice Department and European antitrust enforcers on Monday, according to a source close to the company. GE will argue to antitrust enforcers - who stopped the deal between Halliburton and Baker Hughes just months ago - that their deal is complementary, and that they are committed to any remedy needed to win approval, the source said.
A small part of GE's business is selling equipment to Baker Hughes' competitors and it will continue those sales, the source said.
All of GE's oil and gas business, which generated roughly 14 percent of GE's revenue last year, will go into the new company, leaving no energy units behind in its former parent, Simonelli said.
The "best performers" from the existing GE and Baker Hughes will form new management teams, he added, declining to comment on potential layoffs.
Analysts said there was little overlap between the businesses that would worry regulators.
"I don't see any overlaps, significant overlaps," said Tom Seng, a veteran of the energy business who teaches at the University of Tulsa.
Oil Near $50
The deal comes at a time when North American oil and gas producers are putting rigs back to work after a near-freeze in activity caused by a slump in oil prices that began mid-2014.
But the deal is predicated on a forecast for oil prices to rise to $60 per barrel by 2019, GE Chief Executive Jeff Immelt told investors Monday.
"This is a very compelling time for the deal," Immelt said, noting he expects $1.6 billion in annual cost savings by 2020.
Global oil prices have risen by a third this year to near $50 a barrel.
Craighead, who will become vice chairman of the new company, echoed Immelt's confidence.
"We see growth under any market environment," Craighead said in an interview. "Our customers continue to spend massive amounts of money."
The industrywide push for pumping more oil and natural gas at cheaper costs should only accelerate that trend, he said.
Activist investor Nelson Peltz, whose Trian Fund Management owns about 0.8 percent of GE as of June 30, told CNBC the new company would be able to go "nose-to-nose" with Schlumberger.
Shareholders of Baker Hughes, which had a market value of about $26 billion as of Friday, will get a special one-time cash dividend from GE of $17.50 per share - or $7.4 billion - after the deal closes.
The new company, to be listed on the New York Stock Exchange, will have dual headquarters in Houston and London.
Baker Hughes shares rose as much as 5 percent in morning trade before reversing course to trade down nearly 8 percent at $54.60. Shares of GE slipped 0.1 percent to $29.18.
Centerview Partners and Morgan Stanley are advising GE, while Shearman & Sterling is its legal adviser. Goldman Sachs & Co is Baker Hughes's financial adviser, with Davis Polk acting as legal adviser.
(Reporting by Ernest Scheyder, Swetha Gopinath, Ankit Ajmera and Diane Bartz; Editing by Ted Kerr and Nick Zieminski)