Is Politics Behind Justice Department Thwarting Halliburton-Baker Hughes Deal?

by Deon Daugherty, Senior Editor

Under the banner of preserving the beleaguered oilfield services sector, the U.S. Department of Justice (DOJ) slapped a civil antitrust lawsuit to block the proposed Halliburton (NYSE: HAL) merger with Baker Hughes (NYSE: BHI).

The DOJ filed its lawsuit April 6 alleging that HAL’s acquisition of BHI – a $34 billion deal – would eliminate head-to-head competition in markets for 23 products or services used in both onshore and offshore oil exploration in the United States.

But while the union of HAL and BHI may be in jeopardy, another happy coupling is merrily chugging along in the oilfield services sector. Worth about $14.5 billion, SLB’s bid to buy CAM in 2015 sailed through the government’s hoops. The deal closed April 1.

Which brings us to a question that admittedly might have several, highly nuanced reasons: What’s holding up Halliburton and Baker Hughes?

I asked James West, a go-to analyst at Evercore ISI for his thoughts on what’s put the HAL/BHI deal on the backburner.

“I think it’s because there was no product overlap with CAM whereas with HAL/BHI there is significant overlap which requires divestitures,” he said. “We also can’t rule out some political overtones as this is Halliburton (read Dick Cheney) going up against a Democratic White House.”

The DOJ alleges that the HAL/BHI deal would raise prices and reduce innovation in the oilfield services industry. Halliburton and Baker Hughes are two of the three largest integrated oilfield service companies across the globe, and they compete to invent and sell products and services that are critical to energy exploration and production, Bill Baer, an assistant attorney general in the antitrust division, said in the statement.

“We need to maintain meaningful competitions in this important sector of our economy,” he said.

When we’re talking about “meaningful competition” in the oilfield services space, let’s be clear. It’s worth noting that in recent decades, the industry has known a “Big Four” among its ranks. As of April 26, Schlumberger’s (NYSE: SLB) market cap was $110.22 billion; next was HAL with $34.41 billion; then, BHI with $19.98 billion; and lastly, Cameron (NYSE: CAM) with $12.65 billion.

When the shale renaissance was in full swing, at least a couple hundred smaller companies set-up shop as oilfield services; according to Haynes and Boone LLP’s Oilfield Services Bankruptcy Tracker, 51 of those smaller oilfield service companies have gone belly-up. Competition didn’t do much for those folks.

In any event, Halliburton has pledged to vigorously defend itself.

In a joint statement with BHI, the HAL said, “The companies believe that the DOJ has reached the wrong conclusion in its assessment of the transaction and that its action is counterproductive, especially in the context of the challenges the U.S. and global energy industry are currently experiencing.”

But, recent events suggest the deal is fading farther from reality.

HAL has delayed its earnings call past its April 30 merger termination date. Before the DOJ announced its lawsuit, the date was March 1. Analysts at Raymond James and Associates (RayJa) said in an April 25 research note that earnings call dates typically yield little information, but this one doesn’t bode well for the merger.

“With the change in release date, we now think it is more likely that one party steps away from the deal,” the analysts wrote.


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