GE to Give Up Majority Control of Baker Hughes
At least one write down is coming when General Electric Co. reports its third-quarter earnings results next month. The struggling industrial giant is selling off another chunk of its stake in Baker Hughes as CEO Larry Culp scrounges up more cash to fund his turnaround strategy. GE will offer 105 million class A shares in a secondary offering (the underwriters have the option to purchase up to an additional 15.75 million), while Baker Hughes will buy back $250 million worth of class B stock, according to an announcement after the close of trading on Tuesday.
Collectively, the actions will reduce GE’s stake in the entity formed by the 2017 merger of its oil and gas unit with Baker Hughes to less than 50%. That will force GE to give up most of its board seats at Baker Hughes. More importantly, the company will now have to deconsolidate Baker Hughes’s results from its own earnings and recognize the difference between what it paid for the deal and what the asset is currently worth.
GE also will lose its control of the Baker Hughes board, giving it only a single seat instead of the previous five. It expects GE veteran John Rice to stay on the board, while departing finance chief Jamie Miller and former director James Mulva will resign.
Former GE-appointed directors Lorenzo Simonelli, who is Baker Hughes’ chief executive, and former GE director Geoffrey Beattie will stay on the board but won’t be GE appointees. If GE’s stake falls below 20%, it will lose its single remaining seat on the board. GE’s core business is making jet engines, turbines, MRI machines and other heavy-duty industrial equipment, and the oil and gas operations long weighed on financial results.
GE spent more than $14 billion on deals in the sector over a decade under former CEO Jeff Immelt, but the timing of the investment was poor. In 2014, GE told investors that its assumptions of growth were based on oil prices at around $100 a barrel just as prices collapsed. Oil closed Tuesday at around $58 a barrel.
Last month, Harry Markopolos, the accounting expert who raised red flags about Bernard Madoff’s Ponzi scheme, accused GE of improperly accounting for the Baker Hughes stake. GE rebutted that claim, saying it is required to report financial information about its Baker Hughes business as part of its own results. Two accounting professors contacted by The Wall Street Journal said GE was properly accounting for the stake.