GE’s Knack for Bad Timing Shows in Ugly Baker Hughes Unwind
(Bloomberg Opinion) -- General Electric Co.’s plan to unravel its Baker Hughes stake smacks of desperation.
The embattled industrial conglomerate said on Tuesday that it will start chipping away at its 62.5 percent stake in Baker Hughes, a GE Co. GE gained this holding when it merged its energy assets into Baker Hughes in 2017. It was previously limited in its ability to dispose of the stake until July 2019, but those restrictions are now being lifted. GE will knock its stake down to just above 50 percent by selling stock back to Baker Hughes and offering another chunk to investors in the public market.
GE unofficially put its Baker Hughes stake on the block last year as then-CEO John Flannery tried to come up with a plan to refocus the company and plug its cash holes. But there were no elegant solutions for going about this, with the expectation of a wind-down adding weight to an already sagging Baker Hughes stock price. GE wanted to avoid the optics of a fire sale, which is why a Baker Hughes divestiture was listed as a secondary option for debt reduction in the breakup plan Flannery laid out in June. With GE’s cash crunch getting increasingly dire, it no longer has the luxury of time.
GE really couldn’t have picked a worse window to sell the stake if it tried, which is something of a theme for its energy-related capital allocation decisions. Baker Hughes plunged 7.3 percent on Monday to its lowest price since 2002. The drop came amid a war of words — and tweets — between OPEC and President Donald Trump, but also likely partly reflected the ongoing slide in its GE parent company’s stock. GE closed below $8 a share after new CEO Larry Culp’s substance-light pep talk on CNBC’s airwaves failed to soothe investors’ concerns about the company’s ability to manage a daunting debt load.
For Baker Hughes, this arrangement gets a sick monkey partly off its back. The “a GE Co.” tagline has been as ungainly for its valuation as it has been for the name. GE will remain a majority shareholder for now, but it shouldn’t take long to get below that threshold once a new six-month lockup agreement expires. At that point, GE’s board representation will also drop from a majority to just one of nine directors. Meanwhile, Baker Hughes retains access to useful GE technology, particularly turbines.
With GE in turmoil and the oil market also taking a dive, the best thing Baker Hughes had going for it was share buybacks, topping up its dividends and putting its overall yield well above that of Schlumberger Ltd. and Halliburton Co. Baker Hughes’s suspension of repurchases in the third quarter — ahead of beginning to disentangle itself from GE — weighed very heavily on the stock. There was no mention of resuming buybacks in Tuesday’s announcement, and it’s possible they won’t re-emerge until GE’s stake dips below half.
As far as radical change goes at GE, this isn’t it. Yes, the divestiture will bring in much-needed cash. Baker Hughes is buying back as much as $1.5 billion of stock from GE. The company’s planned offering of 92 million shares — plus an additional 9.2 million shares under an option for the underwriters — would yield about $2.3 billion, assuming a modest discount to Monday’s closing price. All in, that’s about as much cash as GE raised by cutting its quarterly dividend to a penny per share last month. But this is a plan designed to benefit bondholders, not shareholders. And it will still fall short of giving GE what it needs to bring its debt burden down to more manageable levels.
JPMorgan Chase & Co. analyst Steve Tusa estimates that even accounting for proceeds from the divestiture of the Baker Hughes stake, GE will be staring at a $50 billion gap to get its leverage inclusive of GE Capital liabilities back to a “normal” level of 2.5 times Ebitda in 2020. He includes a $15 billion estimate for net proceeds from a Baker Hughes asset sale. That, of course, is premised on GE selling its whole stake, and there’s still a lot left to sell, even after today’s plan is executed.
What both companies must hope is that this move toward an inevitable separation starts to alleviate the pressure on Baker Hughes’s stock, allowing GE to get higher prices for its residual equity. But the $1.5 billion Baker Hughes is handing over pushes its leverage from 1 times trailing Ebitda to a pro-forma 1.6 times, reducing firepower for buybacks. Until those resume, Baker Hughes will struggle to shake off its discount, thereby limiting GE’s potential proceeds, too.
GE shares rose more than 5 percent on Tuesday, marking only the third time in the past three and a half weeks it’s been in the green. At this point, any step forward is a positive one. Divesting the Baker Hughes stake was always going to be an ugly process, and GE had to start somewhere. But this just further underscores how deep in the hole GE is, and how there’s no easy way out.
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
Brooke Sutherland is a Bloomberg Opinion columnist covering deals and industrial companies. She previously wrote an M&A column for Bloomberg News.
Liam Denning is a Bloomberg Opinion columnist covering energy, mining and commodities. He previously was editor of the Wall Street Journal's Heard on the Street column and wrote for the Financial Times' Lex column. He was also an investment banker.
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