Last fall, General Electric (NYSE:GE) sold nearly a quarter of its shares in Baker Hughes, a GE Company (NASDAQ:BKR) to shore up its balance sheet. The share sale -- split between a secondary offering to outside investors and a buyback by Baker Hughes -- reduced GE's stake in its energy services spinoff from 62.5% to just above 50%.
Earlier this week, Baker Hughes, A GE Company announced that General Electric is executing another secondary offering (alongside a smaller share repurchase by Baker Hughes), which will reduce GE's stake to well below 50%. This will trigger a big accounting charge and will cause GE to stop consolidating Baker Hughes' results in its own financial statements. However, it will contribute to a big reduction in General Electric's debt load over the next few quarters.
GE tees up another share sale
General Electric has agreed to sell 115 million shares of Baker Hughes, a GE Company stock at $21.50 per share in a secondary offering. The deal underwriters have an option to buy another 17.25 million shares within 30 days. Separately, Baker Hughes will spend $250 million to repurchase nearly 12 million shares from GE at the same price.
After these transactions are completed, General Electric will own less than 40% of Baker Hughes, a GE Company. The share sale will generate total proceeds between $2.7 billion and $3.1 billion for GE, depending on whether the underwriters exercise their overallotment option.
How this move will affect General Electric's finances
Because of its position as a majority owner, General Electric has been reporting Baker Hughes' revenue, cash flow, assets, and liabilities in its own financial statements up until now. (This was one of the key criticisms raised by whistleblower Harry Markopolos in his broadside against GE last month.) That will change.
The first major impact on GE's financial statements will come from the need to write down the value of the company's Baker Hughes, a GE Company stake to its market value. That will lead to a one-time special charge exceeding $7 billion in GE's next earnings report.
General Electric will also remove Baker Hughes' revenue from further income statements. Last year, GE reported $22.9 billion of revenue from its oil and gas segment (i.e. Baker Hughes, a GE Company). In addition, General Electric will no longer be able to report its former subsidiary's cash flow as its own. The proportion of Baker Hughes, a GE Company's net income that flows through to GE's bottom line will decline in line with General Electric's reduced ownership percentage and will now be reported as non-operating income. And finally, Baker Hughes' assets and liabilities (including its $6.3 billion of debt) will be removed from GE's balance sheet.
In practice, these changes are less significant than they may appear. While Baker Hughes, a GE Company generates lots of revenue, its adjusted operating profit was just $1 billion last year. For comparison, GE's aviation and healthcare units earned a combined operating profit of more than $10 billion in 2018. As for cash flow, the adjusted industrial free cash flow metric that GE reports already excludes Baker Hughes, a GE Company's cash flow.
Just one of several deleveraging moves
General Electric has moved aggressively to clean up its balance sheet this year. Including the recently announced share sale -- and the related removal of Baker Hughes' debt from GE's balance sheet -- it is poised to make dramatic progress in the second half of 2019.
Last month, the company sold most of its remaining shares of Wabtec, netting about $1.4 billion. It also signed an agreement to sell its aviation lending business at a premium to the $3.6 billion book value of its financing receivables. Lastly, Danaher has made big moves to raise debt over the past couple of weeks, suggesting that it could close its planned $21 billion purchase of GE's biopharma business relatively soon.
GE's balance sheet will remain a work in progress even after all of these transactions close. Most notably, the company's pension deficit -- which stood at $27.2 billion on a pre-tax basis at the beginning of 2019 -- could widen because of the recent plunge in interest rates. That said, GE is well on the road to financial recovery, and its decision to monetize its stake in Baker Hughes, a GE Company is a big part of that story.