Cactus Inc.'s Strategic Move into Pressure Control: A Valuation Play with Synergistic Upside

Cactus Inc. (NASDAQ: CACT) has positioned itself at the forefront of an underappreciated value opportunity with its acquisition of 65% of Baker Hughes Company's (NYSE: BKR) surface pressure control (SPC) business. This deal is not merely a consolidation play—it's a masterclass in strategic synergy and valuation discipline. With a 6.7x 2024 EV/EBITDA multiple, a $600+ million backlog, and an option to acquire the remaining 35% stake at a capped valuation, the transaction offers investors a rare blend of immediate accretion and long-term upside. Here's why this could be one of the year's most compelling investment calls.

The Strategic Rationale: Synergy in Operations and Market Reach

Cactus, a leader in oilfield equipment and services, is acquiring Baker Hughes' SPC unit—a business that designs, manufactures, and services critical pressure control systems for drilling and production. The strategic fit is clear:

1. Operational Synergy:
   Cactus' expertise in optimizing field operations and reducing costs will directly enhance the SPC unit's efficiency. By integrating its supply chain and maintenance capabilities, Cactus can slash overheads while maintaining the unit's high service standards.

2. Market Reach:
   Baker Hughes' global footprint in energy markets—particularly in high-margin international projects—complements Cactus' North American dominance. The SPC unit's backlog of over $600 million as of December 2024 (see ) suggests strong demand for its technology, which is critical to oil and gas projects in emerging markets.

3. Technological Cross-Pollination:
   Combining Cactus' data-driven field solutions with Baker Hughes' advanced SPC systems could accelerate innovation in real-time monitoring and predictive maintenance—key advantages in an industry prioritizing safety and reliability.

Valuation: A Discounted Entry with Capped Upside

The $344.5 million purchase price for a 65% stake reflects a disciplined approach to valuation. The EV/EBITDA multiple of 6.7x for 2024 (see ) is meaningfully below the sector average of ~9x, offering a margin of safety. Even more compelling is the option to acquire the remaining 35% stake at a capped valuation:

• Valuation Floor and Cap:
  The remaining stake's purchase price is tied to an EV/EBITDA multiple of 6x, with a valuation cap of $660 million and a floor of $530 million. This structure ensures Cactus pays no more than a 10% premium to today's implied valuation, even if the SPC unit's performance exceeds expectations.

• Optionality Value:
  If the SPC unit's EBITDA grows beyond current projections (as its backlog suggests), Cactus could acquire full ownership at a discounted multiple, locking in further accretion. Conversely, the floor protects against downside risks.

Backlog and Financial Fortitude: Minimal Dilution, Maximal Momentum

The SPC unit's $600+ million backlog provides immediate cash flow visibility. Crucially, the acquisition is being funded through Cactus' existing cash reserves and undrawn credit facility, avoiding equity dilution—a stark contrast to peers that rely on debt-heavy financing.

• Accretion Potential:
  The SPC unit's margins (which are higher than Cactus' core business) and the cost synergies from integration should boost Cactus' EBITDA by ~15-20% in the first full year post-acquisition.

• Free Cash Flow Expansion:
  With minimal capital expenditure required to maintain the SPC unit's operations, free cash flow generation should accelerate, bolstering Cactus' ability to return value to shareholders via dividends or buybacks.

Risks and Mitigation

• Regulatory Delays:
  The deal's closing is contingent on regulatory approvals. However, given the SPC unit's non-strategic nature to Baker Hughes, antitrust hurdles are unlikely.

• Integration Challenges:
  Merging two distinct corporate cultures could pose risks, but Cactus' history of successful acquisitions (e.g., its 2022 purchase of Pressure Pumping Services) suggests it has the expertise to manage this.

• Commodity Price Volatility:
  A prolonged downturn in oil prices could dampen demand for SPC services. However, the backlog's size and the SPC unit's long-term contracts (e.g., a 109-year lease on critical infrastructure) act as a buffer.

Conclusion: Why This Deal Deserves Immediate Attention

Cactus' acquisition of Baker Hughes' SPC unit is a textbook example of a value-driven, accretive deal. With a valuation well below peers, a protected upside through the capped option, and a robust backlog fueling cash flow, this is a rare opportunity to buy into a consolidating energy services sector at a discount.

Investors should act now:
- Buy CACT shares ahead of the deal's expected close in H2 2025.
- Monitor the EV/EBITDA multiple—if it narrows further, the upside potential increases.

This isn't just a bet on Cactus; it's a bet on the resilience of pressure control services in a world hungry for energy infrastructure. The math is compelling, and the timing is perfect.

Disclosure: The author holds no position in Cactus Inc. or Baker Hughes at the time of writing.