What Exactly Are Baker Hughes Shareholders Getting From GE?

Baker Hughes Incorporated BHI shares were surging higher early Monday following an official announcement of a deal with General Electric Company GE. While the merger/spinoff deal is certainly good news for Baker Hughes shareholders, the terms of the deal are far from the typical buyout. GE will be combining its oil & gas segment with Baker Hughes and then spinning off the combined assets into a brand new oil services juggernaut. Here’s a look at exactly what Baker Hughes shareholders are getting.

First, Baker Hughes shareholders will receive $17.50 per share in cash. In addition, they will get a 37.5 percent stake in the newly-formed company. In the press release out Monday morning, GE said it expects the combined company will generate $32 billion in combined revenue per year.

In 2015, Baker Hughes generated just shy of $16 billion in revenue.

In other words, Baker Hughes shareholders will get $17.50 per share of cash plus a 37.5 percent stake in a new company that is about twice the size of Baker Hughes today.

Using Friday’s closing price as a guide, a 37.5 percent stake in a company with a market cap twice the size of Baker Hughes suggests around $44 in equity per current Baker Hughes share. If you tack on the $17.50 in cash, that makes the deal worth right around $61.50/share. Baker Hughes shares opened Monday’s trading session at almost exactly the $61.50 level.

Of course, these numbers don’t include any synergy benefits, which could be significant.

Halliburton Company HAL’s proposed buyout of Baker Hughes was eventually dropped after the deal ran into significant regulatory resistance.

Halliburton and Baker Hughes combined generated roughly $40 billion in revenue in 2015. However, Halliburton’s buyout of Baker Hughes would have eliminated the third-largest competitor in the oil services market, whereas the GE/Baker Hughes deal potentially creates a brand new major competitor for Halliburton and Schlumberger Limited. SLB.

Despite the morning's run, at last check, Baker Hughes was down 5.99 percent at $55.59. GE was up 0.36 percent at $29.33.

Disclosure: The author is long BHI, SLB and HAL.