New Antitrust Concerns About Halliburton, Baker Hughes Deal Not So New

Eight months after two of the world’s largest service companies announced they would merge, a July 22 report said the $34.6 billion merger of Halliburton (HAL) and Baker Hughes Inc. (BHI) has raised antitrust concerns.

The report briefly sent Halliburton stock tumbling 247 days after the deal was announced, and the companies said they expected antitrust scrutiny. Halliburton launched divestment efforts to avoid rankling regulators, saying it would sell billions of dollars worth of revenue-generating divisions.

A Bloomberg report quoted an unnamed source saying lawyers for the U.S. Department of Justice (DOJ) are concerned the oilfield service industry would become too concentrated after the merger.

The article comes after Halliburton and Baker Hughes said July 10 that they had entered into an agreement to extend the DOJ’s antitrust division review of the deal to of Nov. 25 or within 90 days after both companies have certified substantial compliance with the DOJ’s second request.

David Deckelbaum, equity research analyst with KeyBanc Capital Markets, said he was not surprised by the news since the companies have a “laundry list of oversight” including oversight in several countries and a great deal of competitive overlap. Along with many other analysts, he expects the deal to close after divesting its assets in a subpar market.

Halliburton has said it is willing to divest businesses that generate up to $7.5 billion in revenues if required by regulators.

“It’s probably been somewhat exacerbated by the downturn we’ve experienced,” Deckelbaum told Hart Energy. “I’m sure there are several competitors that would be upset that heading into a massive downturn you have two of the largest service companies in the world gaining a superior advantage and being able to sustain an artificially lower price.”

Halliburton and Baker Hughes said they intended to certify substantial compliance with the DOJ’s second requests, issued to each company, by mid-summer.

“Timing agreements are often entered into in connection with large, complex transactions and provide the DOJ additional time to review responses to its second requests,” the companies said.

The companies also agreed to extend the time period for closing the deal to Dec. 1.

Raymond James Equity Research said that Bloomberg does not make it clear whether the DOJ will close down the deal or require large divestitures, said J. Marshall Adkins, analyst.

“We have not changed our view and still expect the deal to go through,” Adkins said. “It is important to keep in mind, however, that the agreement does set forth an upper limit on divestitures of $7.5 billion in revenues.”

Tudor, Pickering, Holt & Co. said the new report was “nothing new” and the deal is on track to go through as planned.

“More than anything else, the exaggerated stock price reactions to the Bloomberg article illustrated how absent bids are in the sector,” the Tudor report said, noting that Halliburton addressed the merger progress on July 20 saying first divestiture bids in hand.

The companies said July 10 they continue to be in discussions with the DOJ, the European Commission and other competition enforcement authorities. Halliburton is currently marketing for sale its Fixed Cutter and Roller Cone Drill Bits, Directional Drilling and Logging-While-Drilling (LWD)/Measurement-While-Drilling (MWD) businesses.

“No change to our view that HAL is committed to make the necessary divestitures to get deal across the finish line,” the report said.

Barclays said July 22 that Halliburton was pleased with the 25 or so bids it received for its marketed assets and plans to complete an auction this fall as it closes the Baker Hughes deal.

Halliburton also proposed additional divestitures, though collective divestitures will remain within an initiation scope of about $4 billion of 2013 revenue, said J. David Anderson, analyst, Barclays.

Halliburton thinks it can still achieve about $2 billion in cost savings by eliminating redundant fixed costs and improving profitability after marrying overlapping product lines.

Halliburton faces a $3.5 billion fee if the transaction terminates due to a failure to obtain required antitrust approvals.

Contact the author, Darren Barbee, at dbarbee@hartenergy.com.