As General Electric (GE) figures out how to go forward, one of the solutions, apparently, is to sell its stake in Baker Hughes (BHGE). Would it be better off buying the whole thing instead?
Melius Research’s Scott Davisthinks it should. Baker Hughes is expected to post free cash flow of $2.3 billion by 2020, more than four times the $520 million dividend GE is set to receive each year. But if GE financed the entire deal, it would receive more than $1 billion in free cash flow, something that could be worth $2.20 in earnings, or 15% upside in its stock price. And that doesn’t take into account the possibility that Baker Hughes’ cash flow might actually come in higher than analysts are currently predicting, Davis says.
Consider what a sale would mean. If GE sold its Baker Hughes stake now, it would make about $19 billion, cash that could be used to pay down its debt or help fund its pension. But it would also mean selling Baker Hughes at what appears to be “the oil & gas trough, and the overhang of the GE sale alone could be worth ~20% on BHGE’s stock price,” Davis says. “GE has other assets to sell and with less P&L impact.”
Davis also sees one more benefit: It would also signal that “GE is no longer willing to be the guy buying at the top and selling at the bottom,” he says. Wouldn’t that be something?
Shares of General Electric have gained 1.5% to $14.89 at 3:49 p.m. today, while Baker Hughes has climbed 1.6% to $26.37. Both have outperformed their respective sectors, as the Industrial Select Sector SPDR ETF (XLI) has risen 1.3% to $76.13, and the VanEck Vectors Oil Services ETF (OIH) has rallied 1.5% to $24.35.
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