GE and Baker Hughes Agree to Create New Fullstream Digital Industrial Services Company

GE and Baker Hughes announced that the companies have entered into an agreement to combine GE's oil and gas business ("GE Oil & Gas") and Baker Hughes to create a global oilfield technology provider with a unique mix of service and equipment capabilities. The "New" Baker Hughes will be a major equipment, technology and services provider in the oil and gas industry with $32 billion of combined revenue and operations in over 120 countries. By drawing from GE technology and Baker Hughes' capabilities in oilfield services, the new company will provide physical and digital technology solutions designed to help increase customer productivity.

Under the terms of the agreement, which has been unanimously approved by the boards of directors of both companies, at the closing of the transaction Baker Hughes shareholders will receive a special one-time cash dividend of $17.50 per share and 37.5 percent of the new company. GE will own 62.5 percent of the company. The transaction is expected to close in mid-2017.

Strategic and Financial Benefits of the Transaction

• Complementary assets and integrated offerings will provide differentiated services for combined company's customers. The company will combine the digital solutions, manufacturing experience and technology from the GE Store and the deep experience Baker Hughes has in the oilfield services sector. With combined revenue of over $32 billion, the product portfolio of GE Oil & Gas and Baker Hughes in drilling, completions, production and midstream / downstream equipment and services will create the second largest player in the oilfield equipment and services industry.  As one company, they will have operations in over 120 countries. Both companies continued to invest during the downturn and have extensive complementary competitive scope across the industry. From GE's fullstream oil and gas manufacturing and technology solutions spanning across subsea & drilling, rotating equipment, imaging and sensing to the Baker Hughes portfolio in Drilling & Evaluation and Completion & Production, the combined company will be moving beyond oilfield services and into oil and gas productivity solutions.

• The combination produces synergies through combined efficiency and growth. The companies expect to generate total runrate synergies of $1.6 billion by 2020, which has a net present value of $14 billion. While this is primarily driven by cost out, the companies believe that the new company is positioned for growth as the industry rebounds.

• Combination positioned to create additional value for Baker Hughes shareholders. The diversified portfolio can deliver through the oil and gas cycle. There is a larger pool of synergies that will help to both improve operating margins and drive organic growth. The "New" Baker Hughes has a solid balance sheet.

• Combination positioned to create additional value for GE shareholders. The transaction is expected to be accretive to GE's earnings per share by $.04 by 2018 and $.08 by 2020. This is another step of GE's transition into a digital industrial company.

Financial Structure
The transaction will be executed using a partnership structure, pursuant to which GE Oil & Gas and Baker Hughes will each contribute their operating assets to a newly formed partnership. GE will have a 62.5 percent interest in this partnership and existing Baker Hughes shareholders will have a 37.5 percent interest through a newly NYSE listed corporation. Baker Hughes shareholders will also receive a special one-time cash dividend of $17.50 per share at closing. The $7.4 billion contributed by GE to the new partnership will be used to fund the cash dividend to existing Baker Hughes shareholders.  Also, part of the capital allocation is a plan by GE to sell GE Water, targeting a mid-2017 closing.  Gain from sale will help to fund core GE restructuring and integration costs, with an expected gain from the sale of up to a $1B.

Headquarters, Management and Board of Directors
The "New" Baker Hughes will have dual headquarters in Houston, Texas and London, UK.

Jeff Immelt, Chairman and CEO of GE will serve as Chairman of the Board of Directors and Lorenzo Simonelli, president and CEO of GE Oil & Gas will serve as President and Chief Executive Officer. Martin Craighead, Baker Hughes Chairman and CEO, will serve as Vice Chairman of the Board. The remainder of the executive leadership team will be a combination of existing leaders from both GE and Baker Hughes.

Upon closing, the "New" Baker Hughes board will consist of nine directors: five of whom, including Chairman Jeff Immelt will be appointed by GE and four, including Vice Chairman Martin Craighead will be appointed by Baker Hughes.

Path to Completion
The transaction is subject to approval by Baker Hughes shareholders, regulatory approvals, and other customary closing conditions.

GE and Baker Hughes are committed to working with the relevant government regulators to achieve the necessary approvals.

Advisors
Centerview Partners is serving as financial advisor to GE on the transaction. Morgan Stanley is also acting as financial advisor. Shearman & Sterling is acting as legal advisor to GE. Goldman Sachs & Co. is serving as financial advisor to Baker Hughes. Davis Polk is acting as legal advisor to Baker Hughes.

Keywords: Oil and Gas Technology, Oilfield Services, Midstream Equipment, Downstream Equipment, Fullstream Oil and Gas Manufacturing, Subsea & Drilling, ARC Advisory Group.