BREAKINGVIEWS-Baker Hughes makes an expensive molecule switch

By Sebastian Pellejero

NEW YORK, July 29 (Reuters Breakingviews) - Baker Hughes BKR.O is betting that it will strike its next gusher not in the oil patch, but through coolant pipes. The oilfield services provider is forking over $13.6 billion to nab Chart Industries GTLS.N from rival suitor Flowserve FLS.N. It’s a costly wager that liquified-gas terminals and liquid-cooled data centers will more reliably outgrow its historical focus on volatile oil exploration. If successful, it could support the company’s valuation comeback.

At $210 per share, a 22% premium over where Chart shares were trading on Monday, the price looks punchy. Take a promised $325 million of annual profit boosts from cost cuts, taxed at the standard U.S. corporate rate, and the deal should produce an over-7% return on invested capital, Breakingviews calculates. That falls short of Chart’s 10% weighted-average cost of capital, according to Morningstar analysts.

Still, capitalizing those after-tax savings at a simple 10-times multiple implies roughly $2.6 billion of value, handily above the $1.7 billion equity premium Baker Hughes is handing over. The Houston-based firm gains more than just the savings. Folding in Chart would nudge its industrial and energy technology arm above half of the group’s earnings, muting exposure to swings in the ever-volatile price of crude oil.

Natural gas offers upside from there. The International Energy Agency reckons nearly 295 billion cubic meters of new liquefaction capacity will start up between 2025 and 2030, the largest wave of capacity additions to date. Chart’s cold boxes and heat exchangers are already standard kit on those projects. There’s also the promise of a rapidly growing business away from energy. Cloud providers like Google are embracing liquid cooling to stop artificial intelligence servers from frying, which can be served by Chart’s cryogenic pumps and storage tanks.

The hope is that these steadier, high-margin business lines will continue to lift Baker’s valuation. Already, the company’s shares trade at around 18 times next year’s expected earnings, according to LSEG, up from 13.5 as recently as April. AI hardware supplier Johnson Controls JCI.N is an example of further potential improvement, trading at over 26 times.

There are pitfalls. Managements’ high hopes for hydrogen hardware may materialize more slowly than expected. Antitrust enforcers will scrutinize any product overlap, while leverage will crest above two times EBITDA.

In addition, Baker must hand over $258 million of a termination fee promised to Flowserve, which agreed to a merger with Chart in June. The tie-up promises a credible route to a more richly valued business, with the seller’s steady gases blunting hydrocarbon volatility. The risk is that savings slip and liquid cooling stalls, leaving a melting ice cube.

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CONTEXT NEWS

Oilfield services provider Baker Hughes announced that it has entered into an agreement to acquire equipment manufacturer Chart Industries for $210 per share in cash. Including debt, the deal values Chart’s enterprise at $13.6 billion.

Goldman Sachs, Centerview Partners and Morgan Stanley are advising Baker Hughes, while Wells Fargo is advising Chart.