Why Barclays Thinks GE's Deal With Baker Hughes Makes A Ton Of Strategic Sense

Shares of Baker Hughes IncorporatedBHI slid 6 percent on Monday, versus a 2 percent decline in the OSX, on concerns surrounding the economics of the deal with General Electric Company GE.

Although the financials of the deal are disappointing, the merger makes “a ton of sense strategically,” Barclays’ J. David Anderson said in a report.

Anderson maintains an Overweight rating on Baker Hughes, with a price target of $61. He mentioned that the valuation of the new publicly-listed company, to be formed by the merger between Baker Hughes and General Electric’s Oil & Gas (O&G) business, appeared “underwhelming,” on pro forma EBITDA guidance.

“Based on our math, GE O&G was given a several turn multiple premium to BHI, which is surprising given GE O&G is more levered to later-cycle deepwater,” Anderson commented. Moreover, the deal is based on expectations of oil prices rising to $60 per barrel by 2019, an article published by Reuters stated.

Logic Of The Merger

The analyst mentioned that the logic of the merger seemed “quite compelling.” Baker Hughes’ products and services would benefit from strong global distribution channels, data analytics and the broad GE Store.

“As a leading manufacturer with a great set of products and tools, BHI can now leverage GE’s global distribution platform to boost sales of ESPs, directional drilling, and wireline, while the pull through from GE’s industrial presence (particularly in the Middle East) will lead to share gains,” Anderson wrote.