Halliburton (ticker: HAL) and Baker Hughes (ticker: BHI) have begun preliminary talks of a merger, Dow Jones reported on November 13, 2014. BHI confirmed the report later in the evening but did not make any guarantees as to the completion of the merger. “Baker Hughes does not intend to comment further on market speculation or disclose any developments unless and until it otherwise deems further disclosure is appropriate or required,” the statement read.
HAL and BHI hold enterprise values of approximately $51 and $26 billion, respectively, according to EnerCom’s OilService Weekly report. The two giants are the second and third largest oilservice companies in the world, trailing only Schlumberger (ticker: SLB) and its enterprise value of $137 billion. The three companies together make up approximately 64% of the entire oilservice sector in EnerCom’s report, which consists of 44 companies.
If completed, the combination will be the second largest energy deal of the year behind Kinder Morgan’s consolidation of its MLP subsidiaries – a deal amounting to roughly $140 billion.
Department of Justice May be a Huge Hurdle
A common point of several analyst write-ups concerned reaction from the Department of Justice. Raymond James preceded any statements regarding the merger with the word “potential” four different times in as many sentences in a note on November 14. “While the merger of two of the largest players in the oil service arena would cause a significant shift to the oil service landscape, it would unsurprisingly face a significant amount of scrutiny from the Department of Justice,” says the note. “As demonstrated below [with the Herfindahl-Hirschman Oilservices Index (HHI)], we expect the DoJ to place scrutiny on a number of segments. The market segments that screen the most concerning by this metric are Cementing, Completions Equipment and Services, and Logging While Drilling.”
Source: Raymond James
Benjamin Schuman, an analyst with Drexel Hamilton LLC, agreed in an interview with the Associated Press. “They would be so dominant that you may even see some pushback… Folks could be concerned. You could have one player with close to 40 percent market share if nothing is divested or shut down.”
Raymond James says the two companies are so massive there will certainly be considerable overlap. Halliburton would also gain a much greater share in the United States and a rough estimate on synergies estimates value “north of $1 billion.”
A comparison by 24/7 Wall Street said the HAL-BHI combination would likely top Schlumberger’s revenues but not match its profitability. “That’s where the magic word — synergies — comes in, and we could expect to see some sizeable cuts to headcounts. Halliburton reports 80,000 employees and Baker Hughes reports 61,100 for a total of 141,100. Schlumberger reports 123,000 employees. That offers some idea of where more profits will have to come from.”
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