Halliburton-Baker Hughes Merger In Trouble Again?

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The troubles of Halliburton (NYSE:HAL) – the world’s second largest energy services company – which announced a $35 billion deal last year to acquire its closest rival, and the world’s third largest energy services company, Baker Hughes (NYSE:BHI), do not seem to be ending soon. The deal, which is likely to create a mammoth entity that could potentially challenge the industry leader Schlumberger (NYSE:SLB), has been facing a number of regulatory challenges due to antitrust issues arising from the merger. The latest one in the list of these hurdles is the US Department of Justice’s (DOJ) potential mandate that may require Halliburton to sell its assets worth $7.5 billion to a single buyer. While there are chances that the oilfield contractor will end up finding buyers for its two drilling assets, it might be very challenging to look for a single buyer to buy both these assets. In this note, we aim to discuss the implications of this directive on the closure of the deal by end of 2015.

See Our Complete Analysis For Halliburton | Baker Hughes

A Quick Recap Of The Key Highlights Of The Deal

  • Baker Hughes’ equity has been valued at $34.6 billion, which will be received by the shareholders in the form of 1.12 shares of Halliburton’s stock, along with a cash payment of $19 for each share held.
  • The deal price of $78.62 per share represents a 54% premium to Baker Hughes’ closing stock price on 12th November 2014, when the rumors of the news became public.
  • Post the merger, Halliburton will be able to offer a wide range of products and services and broaden its geographic reach while realizing significant cost synergies.
  • The combined entity is likely to have a dominant position in its key product markets. For instance, the merged company would hold 36% of the pressure pumping market, 48% of the completions equipment and services market, and 49% of the market for cementing services.
  • If the deal does not pass through due to failure to obtain antitrust clearances, Halliburton would have to pay a sum of $3.5 billion, roughly 10% of the deal value, to the shareholders of Baker Hughes.

Milestones Achieved So Far

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HAL-BHI merger

 Source: Barclays CEO Energy-Power Conference

Why The Divestiture?

The depressed oil prices have significantly driven down the valuation of most of the energy services companies, which has sparked the merger and acquisition (M&A) activity in the industry. While it may be reasonable for larger oilfield contractors to acquire smaller companies in order to survive the current downturn, the regulatory authorities are concerned about the consolidation of the industry which will hamper competition and result in higher prices for the customers. Thus, to get the regulatory clearance for its merger with Baker Hughes, Halliburton had announced its plans to sell its fixed cutter and roller cone drill bits, directional drilling and logging-while-drilling (LWD)/measurement-while-drilling (MWD) businesses in April this year. The company expected to sell the two assets i.e. drilling services and drilling bits business, which generate estimated revenues of $7.5 billion, as separate units to two different parties. Though the market was not sure if the sale of these assets would enable Halliburton to obtain the regulatory approvals, the company went ahead with the bidding process. However, to the company’s surprise, the New York Post published an article, earlier this month, highlighting the possibility of the US DOJ requiring Halliburton to sell the two assets as a consolidated unit to a single buyer. This triggered a wave of rumors regarding the potential bidders and the implications of the news on the fate of the merger.

HAL-BHI-Price

Source: Google Finance

Potential Buyers

General Electric Company (NYSE:GE) has emerged as the biggest, and the most probable, bidder for Halliburton’s assets. There are two major reasons behind this. Firstly, the industrial conglomerate has been diversifying its operations into the oilfield services industry. Currently, the company holds a 5.4% share in the oilfield services market, which contributes to more than 10% of its valuation. Furthermore, the company aims to expand its exposure in the oil and gas sector and the current deal could be a smart move to strengthen its market share in the oilfield services industry. Secondly, General Electric has a huge amount of cash on its balance sheet which it can use to buy these assets. As of 30th June 2015, the company had a cash balance of almost $75 billion [1], which is roughly 10x of the value of the assets for sale by Halliburton. Thus, General Electric has the motive as well as the resources to buy these assets, making the company a perfect suitor for Halliburton’s assets.

See Our Complete Analysis For General Electric

After General Electric, Weatherford International Plc. (NYSE:WFT) is the strongest player in the race to get Halliburton’s assets. Post the merger between Halliburton and Baker Hughes, Weatherford is likely to become the third largest energy services company in the industry. Consequently, it would make strategic relevance for the company to acquire Halliburton’s assets. In fact, rumors are that Weatherford is likely to bid for these assets soon, since the company has announced its intentions to raise $1 billion by carrying out a public offering of ordinary shares, and issue subordinated notes of its wholly-owned subsidiary, Weatherford International Ltd. The company would use the proceeds to run its day-to-day operations and/or fund a potential acquisition. Therefore, buying Halliburton’s assets could be in the cards for Weatherford.

According to Bloomberg, companies such as Siemens AG (ADR) (OTCMKTS:SIEGY),  Dover Corp. (NYSE:DOV), and Nabors Industries Limited (NYSE:NBR) are also interested in purchasing these assets. Halliburton is expected to evaluate the bids and come up with a buyer by next month.

Impact On The Closure Of The Deal

While finding a single buyer could be a difficult task, we do not see this becoming a huge hindrance in the completion of the merger. As illustrated above, there are many companies that are eyeing Halliburton’s assets. Due to the weak commodity prices, most of the companies are willing to gain exposure into the oil and gas sector so that they could profit from it when the market eventually recovers. Thus, we don’t anticipate the DOJ mandate to create a disturbance in Halliburton’s plans of completing the merger by the end of the year. Besides, even if the company is unable to complete the merger by the end of the year, it has an option of extending the deadline to 2016. However, it remains to be seen whether the current asset sale would be sufficient to obtain the DOJ’s approval for the merger.

HAL-next steps

Source: Barclays CEO Energy-Power Conference

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Notes:
  1. General Electric 2Q Results, www.ge.com []