Baker Shareholders Told Firm Will Sell Units to Enable Merger

Baker International Inc. executives said Wednesday that the company is preparing to sell all or portions of certain key operations to satisfy the U.S. Justice Department’s concerns over the antitrust implications of its proposed $1.2-billion merger with Hughes Tool Co.

Baker President James D. Woods, who was elected Wednesday to succeed Earnest H. Clark Jr. as the Orange-based oil services firm’s chief executive officer, said the required sale of Baker’s tricone drill bit and electric submersible pump manufacturing operations would raise up to $65 million.

At Baker’s annual shareholders meeting Wednesday, Woods said “the phone was ringing off the hook” with inquiries from potential buyers after the Justice Department’s divestiture ultimatum on Sunday.

Baker had originally scheduled a shareholder vote on the proposed merger for Wednesday. But that special meeting has been postponed until Feb. 25 because of the Justice Department’s objection. The agency has threatened to file a lawsuit to stop the corporate marriage. Meanwhile, the companies and the Justice Department are continuing negotiations.

On Wednesday, Baker said a $34.2-million loss for its first fiscal 1987 quarter, ended Dec. 31, contrasted with a net profit of $16.3 million in the first quarter of fiscal 1986. Revenues for the quarter were $297.7 million, down 32.7% from revenues of $442.7 million for the same quarter a year ago.

Hughes Reports Loss

Meanwhile, Hughes Tool Co. Wednesday reported a loss of $475.9 million for the year ended Dec. 31, contrasted with net income of $4.1 million for 1985. The company’s 1986 revenues were $806.1 million, down 36.1% from $1.26 billion the previous year. Fourth-quarter net income was $31.7 million, up from $560,000 for the final quarter of 1985. Fourth-quarter sales were $215.65 million, down from $313.6 million.

In an interview, Woods refused Wednesday to identify those interested in buying the submersible pump and tricone bit divisions other than to say they are all involved in the oil and gas industry. He said that the Justice Department wants the divisions to be sold to a company that does not already have a major rock bit or electrical submersible pump business.

“We just have to be convinced it (any sale) will solve the competitive problem,” said Charles Rule, acting assistant attorney general. He said there are numerous options for disposing of the divisions, including setting up new companies. It is important, he said, that the divisions be sold to someone independent of Hughes and Baker and economically strong enough to survive.

Without the divestiture, the combined companies would claim 53% of the worldwide bit market and at least a 30% share of the submersible pump market. After the sales, their combined market share would drop to about 26% for submersible pumps and to 36% for rock bits. Woods said that in the currently “dismal” market for oil industry companies, Baker has been informed that the divisions would sell for approximately the same value as their combined annual revenues, which are $65 million.

In the negotiations, Woods said, Baker is arguing that it should not be required to sell the international portions of the divisions that the Justice Department has targeted for divestiture.

Baker’s domestic sales of electric submersible pumps and tricone drill bits, he said, represent about $38 million in annual revenue, including $8 million from electrical submersible pumps and $30 million from tricone drill bits.

Clark Steps Down

Culminating 22 years as Baker’s chief executive officer, Clark, 60, on Wednesday handed the reins of office to his protege. But he said he would continue to serve as chairman of Baker and later of Baker/Hughes.

Clark told shareholders that even if the company’s current negotiations with the Justice Department conclude by requiring Baker to sell its Lift Systems and Reed Mining Tools divisions in their entirety, “we still think it is a good merger.”

Clark said the potential annual revenue loss of $65 million from the divestiture represents only about 3% of the $2 billion combined annual revenues of Hughes and Baker. He agreed with analysts’ projections that the sale of the rock drill bit and submersible pump divisions would reduce by about 30% to 35% the $100-million-a-year savings anticipated from the Baker/Hughes merger.

In hope of bringing a buyer to the bargaining table to grease negotiations with the Justice Department and to complete the merger with Hughes, Clark said Baker will ask its investment banker, Shearson Lehman, to start marketing the divisions.

“Strategically the merger is going to make this company a premier performer as the (oil service) industry comes out of the doldrums,” Clark promised Baker shareholders. Even in a worst case scenario, Baker is predicting an industry-wide turnaround with a revival of drilling between 1988 and 1990.

Explaining Loss

The continued viability of the merger with Hughes was about the only upbeat note that Baker’s management offered at the annual meeting, most of which was spent explaining how plummeting oil prices and drilling worldwide had resulted in Baker’s $273-million annual loss for its fiscal 1986.

Also at Baker’s annual meeting, spokesmen for the New York State Common Retirement Fund and the Ministers and Missionaries Benefit Board of the American Baptist Churches, both of which hold stock in Baker, asked the company to terminate its operations in South Africa in protest of the South African government’s racial segregation policies.

Woods said that although company management opposes apartheid in South Africa, it believes that both Baker’s shareholders and its black employees in South Africa will benefit more by the company’s staying. He acknowledged, however, that South Africa is an important market for Baker’s mining equipment operation. The company, he said, reaps “close to $50 million” in annual revenue and $5 million to $6 million in annual profit from South Africa.