Hughes Tool and Baker to Merge; $1.2-Billion Deal : Oil Drilling Equipment Makers’ Plan Reflects Industry’s Depressed State
Offering fresh evidence of the severe depression in the nation’s oil industry, Baker International and Hughes Tool, two of the largest makers of oil drilling equipment, said Wednesday that they have agreed to merge in a $1.2-billion transaction.
The companies said the new firm--to be named Baker Hughes and based in Houston--would allow them to shrink excess manufacturing capacities, reduce operating costs and better weather what is expected to be continued disruption in world oil prices and drilling activity.
The merger is not expected to have an effect in Southern California because Baker, although based in Orange, has virtually all of its domestic operations in Houston, where Hughes is based.
The deal is the largest yet among oil service companies that, because of the persistent oil glut, are now serving the lowest level of oil drilling activity since World War II, according to a recent count of active domestic oil rigs.
Would Be No. 3
If approved by federal regulators, the deal would combine the world’s third-largest oil services company, Baker, with Hughes, the world’s fifth-largest, to create what would still be the third-largest oil-services company, behind Schlumberger Ltd. and Halliburton Co. But, as one Baker official noted: “Now we’ll be 90% the size of Halliburton, not just 50%.”
In 1985, Hughes, founded in 1909 by the father of the late Howard Hughes, had sales of $1.3 billion and a profit of $4.1 million. Baker had sales of $1.9 billion and a profit of $87.7 million. For the first nine months of their current fiscal years, Hughes had sales of $590 million and a loss, including steep writedowns, of $507.5 million, and Baker had sales of $1.2 billion and a loss of $250 million.
Analysts generally praised the merger for bringing together two strong companies that have faltered only because of the severe oil depression. And some predicted a strong future for the new company once the oil industry turns around.
Sam Albright, an analyst with Kidder, Peabody & Co., who in July said a merger of Baker “with a strong competitor” was a good possibility, called the merger a “blockbuster deal.”
“We have been forecasting a level of dilling activity worldwide that will not allow a lot of companies to earn a competitive return on capital for several years,” he said. “Clearly, Hughes was not going to prosper by itself in the kind of environment we are looking forward to over next two to three years.”
John Curti of Birr, Wilson & Co., a San Francisco investment firm, said he expects the new company to quickly lay off unneeded workers, including managers, and close unnecessary manufacturing plants. But because of the consolidation, Curti said, the new company will be better able to survive this downturn and “will be able to make a tremendous amount of money on lower volumes” once the industry rebounds.
The deal calls for Earnest Hubert Clark Jr., the current chairman and president of Baker, to become chairman of the new company. Known as “Hubie,” Clark has won high marks on Wall Street and throughout the oil industry for his strong leadership style.
Hughes Tool Chairman W. A. Kistler Jr. will become vice chairman and J. D. Woods, Baker’s current chief executive, will become president and chief executive of the new company.
Although both companies service oil drilling rigs, analysts said they do not expect the deal to encounter antitrust problems in winning federal approval because the product lines are sufficiently distinct.
Different Products
Hughes primarily makes drill bits. Baker’s product line includes pumps, devices for controlling oil and gas flow, as well as various equipment used both in testing and drilling new wells.
Officials from both companies said the merger is not expected to have an effect on the ongoing patent infringement litigation between Hughes and Smith International, the Newport Beach oil services equipment maker.
However, insiders at Smith said executives there were quite pleased to hear of the merger and with the prospect that Clark, long a friendly competitor, would be at the helm of the new company. “He’s someone we know and someone we’re friendly with,” the source said.
Earlier this year, Smith declared bankruptcy rather than pay Hughes the $204-million settlement that it was awarded for winning a patent infringement suit against Smith. Since then, the two companies have made little progress towards negotiating a settlement amount that ailing Smith could afford to pay Hughes.
Shortly after the deal was announced, Standard & Poor’s, a debt-rating service, said it has placed both companies on its “creditwatch” list, with “positive implications” for Hughes and “negative implications” for Baker.
May Raise Ratings
The New York company said it may upgrade ratings on about $288 million in long-term debt that Hughes owes as a result of its “combination with a financially stronger entity.” Hughes’ senior debt now is rated B+, while its subordinated debt carries a B- rating.
Under terms of the agreement, each outstanding share of Hughes common stock will be converted into 0.8 share of common stock in the combined company. Each outstanding share of Baker stock will be converted into one share of common in the new company. That will mean Baker shareholders end up with 61% of the new firm’s stock. Borg-Warner, which holds 18.6% of Hughes’ outstanding stock, has agreed to vote in favor of the consolidation, the companies said.
Under terms of the agreement, each stockholder will receive 3 cents and 5 cents, respectively, as the redemption price of certain stock rights.
In addition, Baker on Wednesday declared a quarterly dividend on its common stock of 8.5 cents a share to stockholders of record Nov. 3, payable Nov. 21. This payment, together with the 3-cent rights redemption per share, will equal the regular 11.5-cent quarterly dividend.
Hughes withheld its regular 2-cents-per-share dividend, in view of the 5-cents-per-share redemption payment.
Shares of both companies posted only modest gains on the New York Stock Exchange on Wednesday, before the merger was announced. Baker closed at $10.375 a share, up 12.5 cents, on modest volume of 86,000 shares traded. Hughes also gained 12.5 cents to close at $7.75 as 210,000 shares traded.
