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GE Completes Merger of Oil & Gas Unit with Baker Hughes

Redefining the sector dynamics, industrial goods manufacturer General Electric Company GE completed the merger of its Oil & Gas business with Baker Hughes Incorporated BHI to form an industry leader with an unrivalled mix of service and equipment capabilities.

However, this multi-billion deal received lackluster response from investors as General Electric’s shares increased a mere 1.6% to close at $27.45 yesterday.

The Deal

Under the terms of the agreement, GE Oil & Gas and Baker Hughes formed a new entity (the “New” Baker Hughes – a General Electric company) using a partnership structure, following which both the parties contributed their operating assets to the newly formed partnership. General Electric owns the majority stake of 62.5% in the new company and the remainder is held by the erstwhile Baker Hughes shareholders, who will also receive a special one-time cash dividend of $17.50 per share on Jul 6. General Electric has contributed about $7.4 billion to the new partnership to fund the dividend.

The “New” Baker Hughes, to be listed as BHGE, has dual headquarters in Houston, TX and London, U.K., along with nearly identical representation in the Board of Directors. It has operations in over 120 countries and combined revenues of $23 billion. Such strategic deals are likely to lift the sagging shares of General Electric that have underperformed the Diversified Operations industry with an average year-to-date loss of 13.1% as against a 2.2% gain for the latter.

The Rationale

With a complementary portfolio of operating assets and integrated offerings, the new entity will be able to better serve the existing customers of both the companies. While General Electric possess unique capabilities in fullstream oil and gas manufacturing and technology solutions spanning across subsea & drilling, rotating equipment, imaging and sensing, Baker Hughes has proven expertise in drilling & evaluation and completion & production services. The transaction has reportedly created the second largest player in the oilfield equipment and services industry.

Through effective utilization of combined resources, the synergistic deal is likely to yield $1.6 billion by 2020. The transaction is anticipated to be accretive to General Electric’s earnings by 4 cents per share by 2018 and 8 cents by 2020.

Moving Forward

We remain impressed with the inherent growth potential of the combined entity. General Electric currently carries a Zacks Rank #4 (Sell). A couple of better-ranked stocks in the industry include 3M Company MMM and Honeywell International Inc. HON, both carrying a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

3M has a long-term earnings growth expectation of 9.7%. It surpassed estimates thrice in the trailing four quarters with an average positive earnings surprise of 1.3%.

Honeywell has a long-term earnings growth expectation of 9.3%. It surpassed estimates thrice in the trailing four quarters with an average positive earnings surprise of 2.0%.

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3M Company (MMM): Free Stock Analysis Report
Honeywell International Inc. (HON): Free Stock Analysis Report
General Electric Company (GE): Free Stock Analysis Report
Baker Hughes Incorporated (BHI): Free Stock Analysis Report
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