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IT'S OFFICIAL: Halliburton Buys Baker Hughes For $35 Billion

IT'S OFFICIAL: Halliburton Buys Baker Hughes For $35 Billion

It will go down as the largest deal in the history of the oil service industry. It will profoundly impact the landscape in the oilfield, particularly in North America. It is a transformative deal that no one saw coming just several weeks ago. It is happening.

This morning, Halliburton and Baker Hughes announced an agreement whereby Halliburton will purchase all the outstanding shares of Baker Hughes in a stock and cash transaction.

The deal is expected to close in 2H15, and the companies have retained a high-profile antitrust attorney to help navigate what will no doubt be intense regulatory scrutiny. Halliburton has agreed to pay a fee of $3.5 billion if the transaction doesn't go through because of antitrust issues. The size of the break-up fee shows management's confidence in the deal's ability to close.

Last Thursday, news of fast moving deal talks between the two oil service giants leaked to the press. Then talks stalled and a hostile takeover seemed possible as the two disagreed on valuation, and Halliburton moved to overturn Baker Hughes' board. But working through the weekend, it turns out that the differences were not irreconcilable, and the management teams have agreed on a deal that will combine the two firms.

Unanimous Approval Creates A New Oil Service Bellwether

Unanimously approved by both boards of directors, the deal values Baker Hughes shares at $78.62. This is a 54% premium to Baker's share price before the deal talks leaked, and a 31% premium to where shares were trading after the leak. It is even a 4% premium to where Baker's shares were trading this summer, which was near a multi-year high for the company's stock.

The combined market value of the two companies is just over $80bn. On a pro-forma basis the combined company had 2013 revenues of $51.8 billion, more than 136,000 employees and operations in more than 80 countries around the world. Schlumberger by comparison has a market value of $123bn, $45bn in 2013 revenue, and 123,000 employees.

The deal rationale is powerful, and shareholders will likely welcome the deal. Baker Hughes shareholders will own 36% of the combined company, and so participate in the upside of combined operations.

Halliburton CEO Dave Lesar said: "We know how to create value, how to execute, and how to integrate in order to make this combination successful. We expect the combination to yield annual cost synergies of nearly $2 billion." Implications For Employees And Customers

With all of the $2bn in synergies discussed in the deal coming from cost savings, a key concern for all of the employees of both companies is retention. It is too early to say what the combined company's headcount will be, but cost savings certainly anticipate some elimination of overlap.

Regarding retention, Halliburton CEO Dave Lesar offered these comments this morning: "Halliburton alone is hiring 21,000 people this year. Both companies are growing, and this growth creates opportunities for talent. We will use the transition to provide opportunities to the talent within the organizations, and this combination will make the company a place where people are going to want to work."

Another group of stakeholders that will have keen interest in this deal is customers (the E&Ps). This deal effectively turns the Big 4 service companies into the Big 2, and critics will bemoan the competitive implications. However, we'd argue that in today's environment of more complex resource plays (shale, deepwater, and mature fields), having a few "Apples" of oil service (that is large, integrated, innovative companies) will prove to be more valuable to the E&P industry than a fragmented group of discrete service suppliers competing on price.

Regarding customers, Halliburton CEO Dave Lesar says, "Customers always will manage to develop competition among the services industry. By combining product lines together, we can help drive the cost per boe down for customers. It is a great outcome for customers, and they will realize that. We will start an outreach to our customers today. We are confident we can lower their costs. There won't be any renegotiation of existing contracts due to this deal."

Oil Pro
Published on:
November 17, 2014
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