On November 17, 2014 Halliburton Co. (NYSE: HAL) and Baker Hughes Inc. (NYSE: BHI) announced a definitive agreement under which Halliburton – the No.2 biggest oilfield services provider – is going to acquire all the outstanding shares of Baker Hughes – No.3 in the same industry – in a $34.6 billion stock and cash transaction.
The transaction is valued at $78.62 per Baker Hughes share, representing a 56.3% premium with respect to the share price a week before the announcement.
By acquiring the third largest company operating in the oilfield services industry, Halliburton aims to expand the variety of products and services offered to its customers. The new combined company, with $51.8 billion in revenues, would be big enough to challenge the leader Schlumberger.
From the point of view of Halliburton, the deal would realize significant cost synergies since the two companies have significant overlap in the key products segments. The combined entity is expected to yield approximately $2 billion in cost synergies every year (by cutting general & administrative costs and optimizing R&D programs). Moreover, Halliburton believes that the deal would provide the opportunity to realize revenue synergies by strengthening its product portfolio and its global reach (especially in Canada and Russia, where Baker Hughes has a stronger presence).
From the point of view of Baker Hughes, the deal would produce for its shareholders a significant premium as well as the opportunity to own a meaningful stake -approximately 36%- in a larger and more competitive company.
Transaction Terms and Structure
The equity value of the transaction is $34.6 billion (which represents an enterprise value of $38.0 billion) and will be paid both stock and cash. Baker Hughes stockholders will receive 1.12 Halliburton shares plus $19.00 in cash for each share they own, which corresponds to a value of $78.62 per Baker Hughes share. Upon the completion, Baker Hughes shareholders will own approximately 36% of the combined company.
The enterprise value represents a multiple of 8.1 times current consensus on 2014 EBITDA, whereas the equity value embeds a premium of 56.3% with respect to Baker Hughes share price a week before the announcement and of 36.3% with respect to one year.
Despite pitches of favorable outcomes, shareholders did not buy the management story and Halliburton stock price dropped by more than 10% after the deal was announced. On the other hand, Baker Hughes stock price was pushed up by the generous premium offered and gained approximately 25%.
Halliburton intends to finance the cash portion of the deal through a combination of cash-on-hand and committed debt financing.
Halliburton agreed on a $3.5 billion breakup fee that has to be paid to Baker Hughes in case they cannot close the deal. It represents about 10% of the total deal value and it is much larger than the average (approximately 4%). Such a big fee can be interpreted has both a high confidence of Halliburton to overcome regulatory issues and as an assurance of its seriousness about closing the deal.
Regulatory issues are due to the antitrust regulation since the two companies are the second and the third largest in the world operating in the oilfield services industry and, once combined, they would dominate the $25 billion U.S market for onshore fracking. In order to accommodate the Justice Department, Halliburton has committed to sell assets which generate up to $7.5 billion in revenues, which, according to some people with knowledge of the matter, may represent twice the amount that is expected the regulator to ask. These divestitures are aimed to eliminate overlapping businesses in order to reassure the antitrust regulator against the loss of competition.
The transaction is expected to close in the second half of 2015 (subject to the approval of both companies’ shareholders and of the regulator).
Credit Suisse and Bank of America Merrill Lynch are advising Halliburton whereas Goldman Sachs is advising Baker Hughes.
The two Houston Texas-based companies operate in the oilfield services industry providing services to the hydrocarbon exploration and production industry (but not typically producing hydrocarbons themselves). In particular, Halliburton and Baker Hughes drill wells onshore and offshore and they provide additional services such as hydraulic fracturing (fracking), which consists on cracking rocks to let petroleum flow more freely from the oil shale. This particular technique has been the base for the Texas and North Dakota Shale Oil boom. Together, the two companies would dominate the $25 billion U.S. market for onshore fracking.
In the last few years, both Halliburton and Baker Hughes have benefitted from high oil prices. The principal reasons underlying the high oil prices were the reduced production in some of the main OPEC countries along with the high demand for oil. The recent fall of the oil prices has pushed the oilfield services industry into a downturn since drilling activity is expected to decrease (especially in the U.S. where shale oil producers have usually higher break-even levels). For these reasons, after the oil price felt by nearly 30% since July 2014, also the stock prices of the companies operating in the oilfield services industry dropped: Schlumberger lost nearly 20%, Halliburton 25% and Baker Hughes 32%.
With oil prices down 30%, there is a real concern that oil could become too cheap for many drilling companies to be profitable. By combining, Halliburton and Baker Hughes aim to be able to keep the price of their services higher than they would have if they had to compete with each other. Reasoning on this premise, could fear be considered one of the drivers of this deal? Many experts believe so, and the main argument is that the deal came together incredibly fast since deals of this size typically take months to consummate. Experts believe also that if the level of oil prices will keep decreasing, there will be an increase in the M&A activity in the energy industry.
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