US antitrust officials sue to block Halliburton Baker Hughes Merger

Oilfield services provider Halliburton’s takeover of rival Baker Hughes is in jeopardy after US antitrust officials filed a lawsuit against Halliburton on Wednesday. The $35 billion deal was announced in November 2014 and would combine the second and third-largest companies in the oilfield services industry.

Before the official news was announced GMP Securities opined:

Show me the money. The $3.5Bn fee will place BHI at around net debt neutral and allow for roll-up of replacement assets, R&D investments and other technology acquisitions to grow the company. We model incremental EBITDA from projected acquisitions and market share gains in NAM.

What is the downside? We have heard many investors state a desire to buy BHI after the deal breaks and the stock retreats significantly. Interestingly, we find this to be the standard, not the exception, and thus believe the stock will not fall drastically. We view the relative valuation floor of ~8x EV/EBITDA on proforma balance sheet is reasonable, thus downside to ~$38, not mid-$20s as some may expect.

Halliburton Baker Hughes Merger – analysts

Likewise, RBC Capital stated before the official news:

Our View: An unconfirmed story in the New York Post today suggested that the DoJ will move to block the BHI-HAL transaction as early as this week. This outcome is extremely difficult to handicap with any degree of accuracy. As such, we thought it would be useful to provide the following merger update and
scenario analysis.

  • Current deal value for BHI is $57 with an arbitrage spread of ~40%.
    The EC is likely to extend its decision date beyond June 23 as it awaits additional info from HAL.
    There have been no updates from the DoJ since December 2015.
    HAL has already received regulatory approval from the following: Canada, Colombia, Ecuador, Kazakhstan, South Africa and Turkey.
    The merger agreement between HAL-BHI is set to expire on April 30, 2016. Both companies can agree to extend the deadline.
    HAL is required to pay BHI a $3.5bn breakup fee if the deal is not consummated. Either party reserves the right to back out of the deal.


Evercore ISI

When we initially shared our views on BHI downside risk in October 2015 we saw the potential for further downside to our fundamental break values due to arbs exiting the name. However, since then, event driven funds have pulled back significantly, potentially providing BHI with a softer landing than the low-30s break value we outline above. We calculate arb ownership in BHI by subtracting HAL’s pre-deal short interest of 12.6 million shares from the current short interest and attributing 50% of the incremental shorts to arbs and the other 50% to fundamental investors. We then divide the incremental arb-short interest in HAL by 1.12 (equity conversion ratio) to estimate the implied BHI ownership by arbs.

According to our analysis, we believe arbs currently hold 9.6 million shares in BHI, down from a peak of 20.8 million shares.

Unsurprisingly, the spread at the time of the peak was 11.4%, significantly better than the 37.6% currently; implied ownership when the spread troughed at 6.0% was 13.0 million shares. This analysis dovetails well with the lack of recent inbounds we’ve received from arbs as well as the lack of interest on the name seen by our special situations trading desk in recent months.

See the following visualizations which highlight financial figures regarding Halliburton and Baker Hughes.

Baker Hughes vs Halliburton 2-Year Returns


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Halliburton Company (HAL) Stock Price – Current Day


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Baker Hughes Inc. (BHI) Stock Price – Current Day


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Top 10 Least Profitable Sectors


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Halliburton Baker Hughes Merger
Halliburton Baker Hughes Merger