What Value will GE Generate From ‘New’ Baker Hughes Company?

General Electric (NYSE: GE) recently announced the deal to form a joint venture with Baker Hughes Incorporated (NYSE: BHI) making this the second largest oilfield services company globally after Schlumberger (NYSE: SLB). GE will own 62.5% of the new Baker Hughes and Baker Hughes shareholders will receive $7.4 billion from GE in addition to 37.5% ownership of the new company. This deal is expected to complete by second half of 2017 and we estimate GE’s value from the overall deal to be $39.6 billion in 2018. We present our calculations and rationale for this estimate in the following paragraphs. 

In order to estimate the total value of the new Baker Hughes company, we first calculate the equity value of GE’s Oil and Gas division and Baker Hughes, based on their EV/EBITDA multiple for 2018, without considering the impact of the deal. We expect crude oil prices to improve over the next few years due to the expected OPEC deal to cap their oil production, which will lead to improved EBITDA margins for the above companies over the next few years. Thus we estimate GE’s oil and gas division value to be about $23.7 billion for 2018. Similarly, we estimate Baker Hughes equity value to be around $25.6 billion in 2018.

What will be the present value of the synergies generated from the deal?

This deal is likely to generate overall synergies of about $1.6 billion by 2020, due to the complementary nature of GE’s oil & gas and Baker Hughes businesses. GE expects that the transaction will result in cost synergies of $1.2 billion and revenue synergies of $0.4 billion by 2020. Although this deal is expected to complete in the second half of 2017, we expect the synergies to be realized starting 2018. Thus, we arrive at the present value of the combined synergies from the deal which would be around $14.2 billion, assuming a weighted average cost of capital (WACC) of 8.6%.

We finally arrive at the total value of the merged company to be $63.4 billion in 2018 and GE’s share will be 62.5% of overall value, i.e. $39.6 billion in 2018. However, the value could vary depending on the value derived from the synergies derived from this transaction.

Notes:

1) The purpose of these analyses is to help readers focus on a few important things. We hope such lean communication sparks thinking, and encourages readers to comment and ask questions on the comment section, or email content@trefis.com

2) Figures mentioned are approximate values to help our readers remember the key concepts more intuitively. For precise figures, please refer to our complete analysis of General Electric

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