General Electric Co.(NYSE: GE) is nearing an approximately $30 billion deal with Baker Hughes Inc to integrate its oil and gas segment with the latter. This deal will establish an energy powerhouse that would give General Electric a cost-effective measure to play any recovery in the sector.
The conglomerate intends to contribute cash and its oil and gas business to the new entity which would be majority-owned by GE and have publicly traded shares. According to reliable sources, the deal would be announced on Monday.
Last Friday, Baker Hughes confirmed that it is currently in talks with General Electric. On Thursday, a spokeswoman of GE stated that the conglomerate was pursuing potential collaborations with Baker Hughes, but the company was not considering an “outright purchase.”
A combination of GE’s oil and gas unit with Baker Hughes would establish an entity with over $25 billion in revenue that could reduce the costs to better compete against major rivals in delivering services and equipment to oil rigs and wells. This would also allow the conglomerate to take advantage of an anticipated recovery in the energy industry without having to fully acquire Baker Hughes. Furthermore, this would allow the corporations and their investors to benefit from synergies by combining the two businesses.
After 2 difficult years, General Electric and its competitors in the energy industry have started to see some signs of recovery. Prices of crude oil have recently rebounded to approximately $50, after slumping to $30 per barrel this 2016 from more than $100 back in 2014.
The conglomerate showed signs of improvement during the third quarter, indicated that US rig numbers stayed lower by 50 percent from last year, but had edged higher in the past 3 months. Still, the orders for services were lower across all of the oil businesses of the company.
Just recently, General Electric commented that it is still committed to the oil and gas business for the long term. However, the company also stated that the division’s operating profit will post financial results that are lower by 30 percent for 2016. For over two years, the multinational conglomerate is reducing more than $1 billion in costs.
The possibility of a deal between GE and Baker Hughes garnered a positive reaction as its shares ended last Friday’s session at $29.22, up by 2.1 percent. Meanwhile, Baker Hughes stock ended Friday’s session higher by 8.4 percent to reach $59.12.
The combination of GE’s oil and gas segment with Baker Hughes would be one of the largest transactions by General Electric CEO Jeff Immelt. Since 2007, the conglomerate has performed acquisition deals worth $14 billion to build its oil and gas unit.