Baker’s Reed Tool Division Sale to Pave Way for Hughes Merger

Baker International Corp. said Tuesday that it had signed a letter of intent to sell substantially all of its Reed Tool division to Camco Inc., a small Houston-based oil service company.

The sale, if approved by the U.S. Justice Department, would clear the way for the proposed $1.2-billion merger of Baker and Hughes Tool Co.

Announcement of a buyer for Reed Tool comes only a few days after the Justice Department agreed to extend the tentative deadline for Baker’s selling its rock bit business to nine months, from three months. The sale is contingent on the completion of the merger of Hughes and Baker, which moved its headquarters to Houston from Orange earlier this month.

The price of the transaction was not publicly disclosed, but Baker officials and analysts previously estimated that the sale would be equivalent to the Reed Tool’s annual revenue, which totaled about $76 million last year.

The acquisition would give Camco the world’s third largest drill bit operation, trailing only the combined Baker Hughes and Newport Beach-based Smith International. The Reed operation commands about 19% of the worldwide market for oil field rock bits. Last year Camco reported net income of about $12 million on revenues of $115 million.

Balked at Deadline

Hughes Tool Co. had balked at the original three-month period that the Justice Department had allowed for selling a package of Reed assets consisting of its domestic business and bit manufacturing plant in Singapore.

After Hughes threatened to withdraw from the merger--and just as suddenly recanted and decided to continue negotiations--the Justice Department agreed last week to extend the deadline.

One reason Hughes demanded an extension was to increase the odds that Baker could find a buyer for Reed Tool’s domestic operation and Singapore plant, leaving the rest of the international facilities.

However, the proposed sale to Camco would include most of Reed’s foreign marketing, sales and manufacturing operations. The largest exception would be a plant in Argentina that manufactures pumps as well as bits, according to Wendel Reis, assistant to the president of Camco. He added that it hasn’t yet been determined whether a bit-manufacturing plant in Holland would be part of the deal.

Baker and Camco officials said they expected a definitive agreement to be hammered out within the next several weeks.

Hughes officials could not be reached Monday evening to say whether they favor the proposed sale.

The sale of Reed presumably would remove the Justice Department’s objection to the combination of Baker and Hughes. The government agency has argued that the merger would give the merged company an unfair share of the domestic rock bit market. The Justice Department was also concerned that the merger would unfairly dominate the domestic electric submersible pump markets.

Agreement on Sale

Earlier this month Baker said it had agreed to sell its domestic electric submersible pump business to Gardena-based Trico Industries Inc.

Both sales, however, still have to be approved by the Justice Department, which has said it wants to be sure that the buyers of the bit and pump businesses are strong enough to survive in an industry that has been staggering under plummeting oil prices.

Camco, one of the few oil service companies to have remained profitable through the industry downturn, appears to meet that criterion, according to Earl A. Stolz, an oil service analyst with New Orleans-based Howard, Weil Financial Corp. He said Camco is “solid financially,” has “excellent management” and should have no trouble paying for the transaction.

Still, Stolz said, there could be another delay in the Baker-Hughes merger. Stolz suspects that the Justice Department’s agreement with the two companies may be challenged by Smith International. The parties to the sale “are fully aware that they could be sued by Smith,” he said.

Smith, Stolz said, would want the Justice Department to also require Hughes to settle its outstanding litigation with Smith. Smith owes Hughes $204.6 million as the result of a patent infringement lawsuit. Smith is now appealing that ruling. An attorney representing Smith would not say if Smith is considering such a tactic.