Company: Baker Hughes (BKR)
Business: Baker Hughes is an energy technology company with a portfolio of technologies and services covering the energy and industrial value chain. The Company operates through two segments: Oilfield Services and Equipment and Industrial and Power Engineering. The OFSE segment provides products and services for onshore and offshore oilfield operations throughout the well lifecycle, from exploration, appraisal and development to production, renewal and decommissioning. OFSE is divided into four product lines: well construction; completions, interventions and sealings; Production solutions as well as subsea and surface pressure systems. The IET segment provides technology solutions and services for mechanical propulsion, compression and power generation applications across the energy industry, including oil and gas, liquefied natural gas operations, downstream refining and petrochemical markets, as well as lower carbon solutions for broader energy and industrial sectors.
Market value: $47.84 billion ($48.48 per share)
Activist: Ananym Capital Management
Property: n/a
Average cost: n/a
Comment from activists: Ananym Capital Management is a New York-based activist investment firm founded on September 3, 2024 and led by Charlie Penner (former partner at JANA Partners and head of shareholder activism at Engine No. 1) and Alex Silver (former partner and investment committee member at P2 Capital Partners). Ananym looks for high quality but undervalued companies, regardless of industry. They would prefer to work amicably with their portfolio companies, but are also willing to resort to proxy litigation as a last resort. According to their latest 13F filing, they manage $260 million across 10 positions.
What happens
On October 21, Ananym Capital announced that it had taken a position in Baker Hughes, urging the company to spin off its oilfield services and equipment business, arguing that such a move could help boost its stock price by at least 60%.
Behind the scenes
Baker Hughes is a leading provider of energy and industrial technology services. The company was formed in 2017 through the merger of the legacy Baker Hughes and GE Oil & Gas, combining world-class intellectual property from the GE spinoff assets with the technical expertise of both organizations.
The Company operates in two primary segments: Industrial and Energy Technologies and Oilfield Services and Equipment. The IET unit (55% of forecast 2025 revenue and 60% of forecast 2025 EBITDA) is a long-cycle industrial and energy company focused on gas engineering equipment, including turbines and compressors, and aftermarket services, including new energy applications. The OFSE unit (45%/40%) is a short-cycle oilfield equipment and production services company with an end-to-end portfolio of oilfield services and equipment for well construction and well production.
Management has built a strong track record of effective execution and this success has been reflected in the share price, with the company generating strong returns of 28.26%, 75.29% and 232.98% over the most recent 1-, 3- and 5-year periods.
Within IET, the company has capitalized on its leading position in the LNG sector, where Baker now has a 95% global footprint for the turbomachinery needed in plant engineering, a market expected to grow at a compound annual growth rate of 10% through 2030.
In addition, the company has a strong position in power generation, as Baker is one of the few original equipment manufacturers to supply smaller turbines and complete behind-the-meter power solutions. These offerings have allowed the company to play a critical role in meeting rapidly growing data center demand, as its data center orders grew from $0 to $550 million in just two quarters. Therefore, management is investing heavily in this opportunity – developing larger power systems to support the deployment of mega data centers.
In addition, the takeover of Baker's is pending Chart Industries IET's position in the energy, LNG and industrial sectors is expected to be further strengthened. As a result, IET is approaching an EBITDA margin of 20% and further margin expansion is expected as the business mix continues to shift towards aftermarket services that generate long-term, recurring revenue streams supported by contracts of 10+ years and margins of 35% or greater.
For OFSE, management has taken steps to significantly improve the segment's earnings mix and reduce its cyclical commodity risk. This includes exiting or downsizing non-core businesses and low-margin product lines, such as the surface pressure control joint venture with Cactus; prioritizing Middle East and international markets (now 75% of OFSE sales), which are less correlated with commodity prices; and implementing strict pricing discipline and cost reduction measures by enforcing minimum margin thresholds for new contracts, consolidating product lines and simplifying reporting. However, despite these efforts, OFSE continues to experience strong commodity volatility, impacting both the segment's performance and the company's overall valuation.
Baker is currently valued at approximately 9x EBITDA and operates more closely with its peers in the oilfield services sector (6x-7x EBITDA) than its peers in the industrial and energy technology sectors (16x-18x), despite IET accounting for the majority of the company's revenue and EBITDA. An implied sum-of-the-parts multiple for Baker would value the company at around 13x.
For this reason, Ananym has launched a campaign at Baker calling on the company to either further expand IET relative to OFSE or to seek a sale or spin-off from OFSE.
Ananym believes that a possible separation could result in immediate upside of approximately 51% considering Baker's sum of all parts, even assuming $100 million in synergies from the separation. Furthermore, this upward trend does not reflect much of the potential long-term growth momentum and margin expansion expected from these ongoing operational initiatives – value drivers that shareholders should also better realize through such a move.
This is Ananym's third public activist campaign, founded in September 2024. Knowing Charlie Penner and Alex Silver, we expect them to strive to work amicably with management to create value for shareholders. Therefore, they have already expressed their full trust in management to choose the optimal path for the future, and the company's strong operational track record fully supports this trust.
Additionally, on October 6, the company announced a review of its capital allocation, business, cost structure and operations.
With all signs pointing to a rapprochement between the two parties, we do not expect them to insist on or even demand board representation or continue to engage more in a public campaign. Rather, we expect them to work amicably with Baker behind the scenes to create meaningful shareholder value. However, this collaborative approach should not be confused with weakness as they act as fiduciaries of their own investors and will do whatever is necessary to create value in their portfolio companies. So if management doesn't act decisively, Ananym could quickly switch to a more assertive stance.
Ken Squire is the founder and president of 13D Monitor, an institutional research service on shareholder activism, and the founder and portfolio manager of the 13D Activist Fund, a mutual fund that invests in a portfolio of activist assets.