Fitch Ratings affirmed the ‘AA-/F1+’ long- and short-term issuer default ratings (IDRs) for General Electric (GE) and GE Capital Global Holdings, following the announcement of its agreement to combine GE Oil & Gas (O&G) with Baker Hughes (BHI). The rating outlook is stable.

The combination of O&G with BHI is within Fitch’s expectation that GE could deploy substantial capital for acquisitions over the next several years, much of which could be funded with debt. The transaction will create the second largest global oilfield services business. GE will have a 62% interest in the combined business (‘New’ Baker Hughes), which is being structured as a tax-advantaged partnership between GE and the existing shareholders of BHI.

The combined business should compete more effectively and offer a path toward improved efficiency for customers. GE will pay $7.4 billion of cash to BHI which will be used to fund a dividend to BHI shareholders. The transaction is expected to close in mid-2017. Fitch estimates the enterprise value of the combined business at approximately $50 billion.

BHI is more cyclical than GE O&G, but both parts of the combined business will benefit from increased diversification and a larger customer base. BHI will have access to GE’s research and development resources (GE Store) and GE’s digital technology which could improve BHI’s long-term competitiveness. Fitch expects global exploration and production spending and activity to increase moderately in 2017 with a more robust growth profile in 2018. These considerations should support ‘New’ Baker Hughes’ operational and financial results, particularly given BHI’s strong drilling & completions businesses with a focus on the North American market. Annual synergies by 2020 are projected by GE to reach $1.2 billion, primarily from costs.

Fitch expects GE’s leverage metrics will rise modestly when considering the BHI transaction and possible future acquisitions. GE’s capacity for incremental debt is supported by the recent reduction in absolute risk related to the GE Capital exit, expected growth in earnings and cash flow over the next several years, and additional earnings and cash flow from acquisitions. The impact of the transaction on GE’s financial results and credit metrics should not exceed Fitch’s negative rating sensitivities but does leave the company with less financial flexibility. However, Fitch expects credit metrics such as leverage will remain appropriate for GE’s overall enterprise risk level, which Fitch considers to be relatively low as a result of GE’s diversification, strong market positions, strong services earnings, scale and technology portfolio.

Risks related to the agreement with BHI include integration risk, the realization of anticipated synergies, higher debt at GE’s industrial business following completion of the transaction, the negative cash impact from any breakup fee if the transaction is not completed and the risk that the oil and gas industry remains weak for an extended period.