Business Context and Reporting Period
This Form 8-K, filed on February 22, 2019, by Baker Hughes, a GE Company (BHGE) and Baker Hughes, a GE Company, LLC (BHGE LLC), reports the signing of definitive agreements with General Electric Company (GE). These agreements finalize terms previously announced under the Master Agreement dated November 13, 2018, and its amendments. The filings detail the formation of a joint venture, the sale of specific business assets, and the establishment of exclusive distribution rights.
Key Financial Metrics and Transaction Values
The filing outlines specific financial terms associated with the new agreements rather than reporting standard periodic financial results (e.g., revenue or net income).
- Joint Venture Equalization Payment: BHGE LLC agreed to pay $60 million to GE to equalize ownership interests at 50% each in the new aero-derivative gas turbine joint venture.
- Industrial Steam Turbine (IST) Sale Payment: BHGE LLC will make a cash payment of $13 million to a GE affiliate upon closing of the IST asset transfer.
- Working Capital Adjustments: Both the Joint Venture and the IST Sale are subject to customary post-closing adjustments based on working capital levels at the time of closing.
Material Changes and Transaction Details
The filing details five primary material agreements entered into between February 22 and February 28, 2019:
- Aero-Derivative Gas Turbine Joint Venture: BHGE LLC and GE will contribute assets and liabilities to form a 50/50 joint venture focused on aero-derivative gas turbine engines, parts, and services. Closing is expected on the first business day of the month following the "trigger date" (the later of July 3, 2019, or the date GE ceases to own more than 50% of BHGE voting power).
- Industrial Steam Turbine (IST) Business Sale: BHGE LLC will transfer its industrial steam turbine business (assets, liabilities, and employees) to a GE affiliate. Closing is expected in the second quarter of 2019. The agreement includes a two-year non-compete restriction for BHGE regarding the servicing of a specified installed base.
- Heavy Duty Gas Turbine (HDGT) Distribution: An amended agreement appoints BHGE LLC as GE's exclusive distributor within the oil and gas industry for heavy duty gas turbine units and associated services. The initial term is five years for products and the later of 20 years or the operating service life for services. It includes a perpetual license for certain GE intellectual property (Frame 3 and Frame 5 turbines).
- Controls Tools and GE Additive Agreements: Letter agreements were signed to define access to GE's controls tools for BHGE personnel and to include GE's Additive business unit in existing exclusivity and confidentiality provisions.
- Master Agreement Amendment: Amendment No. 2 extended the negotiation period for these agreements until March 1, 2019, which was successfully utilized to finalize the deals.
Outlook, Risks, and Contingencies
Regulatory Approvals: Completion of the joint venture and asset sale transactions is subject to customary closing conditions, including the expiration of the waiting period under the Hart-Scott-Rodino Antitrust Improvements Act and other regulatory and competition law approvals.
Termination Rights: Both parties retain limited termination rights if covenants are breached and not cured, or if the IST Closing does not occur within one year of the trigger date.
Management Commentary: The transactions were approved by the Conflicts Committee of the Board of Directors. The filing emphasizes that the representations and warranties in the agreements are for the benefit of the parties and should not be relied upon by investors as statements of fact regarding the current condition of the companies.
Investor Verification Checklist
- Verify the status of regulatory approvals required for the aero-derivative gas turbine joint venture and the IST asset sale.
- Monitor the "trigger date" (later of July 3, 2019, or GE's divestiture of majority voting power) to determine the earliest possible closing dates.
- Review the final working capital calculations at closing to determine if the $60 million JV payment or the $13 million IST payment will be adjusted.
- Confirm the scope of the two-year non-compete restrictions on BHGE regarding the industrial steam turbine installed base.
- Assess the impact of the exclusive distribution rights for heavy duty gas turbines on BHGE's future revenue streams in the oil and gas sector.