Halliburton Co. and Baker Hughes Inc. are preparing to call off their $28 billion merger, sources familiar with the situation said on Sunday. Halliburton will have to pay a $3.5 billion termination fee to Baker Hughes.
The deal for Halliburton’s acquisition of Baker Hughes received opposition and resistance from both U.S. and European Union antitrust regulators, who viewed the merger of the second and third-largest oil companies as harmful to competition in the oilfield services industry. The U.S. Department of Justice filed a lawsuit to block the merger in early April, saying it would eliminate competition in 23 products and services in the field of oil exploration, and Attorney General Loretta Lynch said the deal would “skew energy markets and harm American consumers,” according to Business Insider.
The Halliburton takeover of Baker Hughes, originally valued at over $35 billion when it was announced in November 2014, was conceived to better compete against Schlumberger Limited, the world’s largest oilfield services company. The governing contract that was supposed to lead to a combination of the companies expired on Saturday without an agreement between the two firms to extend it beyond the end of April.
— Bidness Etc (@Bidnessetc) April 21, 2016
Shares of both companies have since declined due to rapidly falling oil prices and the worst oil crisis in a generation, which reduced the deal’s value to $34.6 billion. West Texas Intermediate, the benchmark crude for the U.S., has fallen by more than half since 2014, and is currently hovering around $45 a barrel. At current share prices, the merger would have been worth more than $28 billion.
According to an inside source quoted by Bloomberg, who asked not to be identified, the two oil giants are expected to announce the termination of the deal as early as Monday morning. Analysts voiced doubt that the merger would go through after Halliburton announced a delay in the release of its first-quarter earnings, and postponed from April 25 to May 3.
“Because they delayed, this was expected,” Edward Jones analyst Rob Desai said to Bloomberg in a phone interview on Sunday. “Clearly the way the DOJ and regulators have been going the last handful of years, it’s getting harder to do this type of horizontal combination.”
If the merger falls through as expected, Bank of America, Credit Suisse and Goldman Sachs stand to lose a $110 million payment for closing the deal. It is unclear how calling off the deal will affect Halliburton, which sold $7.5 billion in notes back in November, a move that swelled its cash reserves to a record $10 billion, which will likely be used to help cover the $3.5 billion termination fee. Halliburton was also in talks with fellow American multinationals Carlyle Group and General Electric Co. to sell a package of divestitures, which would have appeased antitrust regulators and sold for between $6 billion and $7 billion. It is unclear what will happen to these plans now.
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The Wall Street Journal reported that both companies involved in the potentially failed merger have the possibility of a quick turnaround.
“Halliburton announced late last week that it would take a $2.1 billion restructuring charge to its first quarter earnings, relating to severance costs from layoffs and writing of the value of some of its assets, like older fracking pumps that are no longer being used. In the past, Halliburton has said it had to keep some excess infrastructure in place, despite the downturn, to be ready to integrate Baker Hughes and quickly ramp up as a combined company.”
Because of the substantial termination fee, if the deal fails Baker Hughes would have no shortage of cash reserves, but the company has struggled with its newer business ventures, and it has spent the last year in limbo while being courted by Halliburton. Baker Hughes has been constrained from implementing any restructuring without Halliburton’s oversight, which cost it $110 million in costs that it wasn’t able to cut because of the merger in the first quarter of the year alone. The Journal remained optimistic.
“Still, many analysts believe that all the hand-wringing about Baker Hughes’s fate is overblown: Standing on its own, the company could shake off the malaise that has plagued it in the last year. Unlike many of its peers, Baker Hughes will have a $5 billion cash war chest to spend when oil prices recover and activity ramps up, so it could rebuild and could come out swinging.”
A representative from Halliburton did not return a call for comment made by Bloomberg which was outside of their normal business hours, and a spokesperson for Baker Hughes declined to comment.
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