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GE is taking control of US rival Baker Hughes to create the second-largest oilfield service company in the world and wring additional corporate savings out of their operations ahead of a potential recovery in the sector.
Under the terms of the deal, GE will contribute its entire oil and gas division and pay Baker Hughes shareholders $7.4 billion to create a separate publicly traded company, majority-owned by GE.
GE will own 62.5% in the new Baker Hughes, with Baker Hughes shareholders keeping the balance of 37.5%.
The former is also to contribute $7.4 billion to fund the $17.50 special dividend to existing Baker Hughes shareholders.
GE Oil & Gas chief executive Lorenzo Simonelli is to be the chief executive and president of the new entity, with Baker Hughes counterpart Martin Craighead taking on the role of vice chairman.
GE group chairman and chief executive Jeff Immelt will become chairman of the new company. Inclusive of Immelt and Craighead, the new board will have nine directors — five from GE and four from Baker Hughes.
The pair are hoping for $1.2 billion in synergy-related cost cuts to the end of the decade as they push through a mega-deal to form “a new leader in the oil and gas industry”.
The New York-listed partners have identified $1.6 billion in “runrate synergies” through to 2020, with $1.2 billion of this to come in cost cuts, and some facilities destined to close.
Of the cost-cutting target of $1.2 billion, $800 million is set to be taken out by 2018, reaching $1 billion by 2019 and the full amount the year after, according to an analyst presentation.
The new entity will cut $400 million through sourcing and procurement improvements, $200 million on manufacturing and service footprint rationalisation and another $200 million on process optimisation. Revenue synergies are seen at $400 million.
Simonelli said there is a 25% overlap in facilities — with some assets of the two individual companies just down the road from each other — and hinted at the imminent closure of some facilities.
Combined revenue of GE Oil & Gas and Baker Hughes for this year is estimated at $24 billion, which the companies said compared to an expected $29 billion for oilfield services giant and rival Schlumberger.
However, the new entity is predicted to bring in revenue of $34 billion in 2020, with earnings before interest, tax, depreciation and amortisation (Ebitda) of $8 billion.
The new company is aiming for 60% of Baker Hughes’ 2014 peak earnings by 2020.
GE chief financial officer Jeff Bornstein calculated between $800 million and $900 million in restructuring costs as a result of the merger.
The US engineering giant is also selling its GE Water company on the back of the merger deal, as there are some overlaps and it seeks cash to offset the expenditure. It hopes to close that divestment by mid-2017.
Bornstein also said that, while GE will have just 62.5% of the new company, the structure of the deal will allow GE to incorporate 100% of Baker Hughes for tax purposes.
“We think we can create somewhere between $800 million and a $1 billion of value over time because of that tax (structure),” he said.
The companies are targeting mid-2017 for closing of the deal. However, it is subject to approval by Baker Hughes shareholders, US and international regulators and certain other conditions.
The US Department of Justice moved to block an earlier attempt by Halliburton to merge with Baker Hughes due to anti-trust concerns.
However, analysts and experts universally have said they see much less overlap in the merger between GE Oil & Gas and Baker Hughes and do not believe regulators will voice the same concerns as those that sank the Halliburton deal.