Halliburton, Baker Hughes deal could happen but expect a heavy review

Late Thursday, after much speculation, oilfield services company Baker Hughes Inc.confirmed via press release that the company has “engaged in preliminary discussions with Halliburton Company regarding a potential business combination transaction.”

While the company indicated that it does not intend to comment further “unless and until it otherwise deems further disclosure is appropriate or required,” many analysts in the oil and gas space commented on a possible deal.

Thus far, analysts say the deal could happen in some form, but that any deal is likely to face considerable regulatory and business challenges.

“We believe that the chances of Halliburton and Baker Hughes combining without substantial divestitures are slim given the market share concentrations in almost every significant business they are involved in. However, managements are undoubtedly aware of these and one must presume a lot of work has gone into this already,” said analysts with Cowen and Company, noting that, according to their calculation, Halliburton and Baker Hughes overlap in eleven businesses.

Additionally, the large combined market share is high. “Globally it would turn a number of businesses into duopolies,” the analysts said, as data from Spears & Associates shows Halliburton and Baker Hughes in the top three in global market share in ten different product lines.

“While one may be able to argue that shares look different on a market by market basis, we are still struck by the market share concentration that this would bring about. The market segment that may be the most problematic is completion equipment and services where the two companies are dominant with a combined 54% share,” the analysts continued.

The overlap across product lines is sure to draw the eye of regulators, the analysts agreed.

“The primary obstacle in a deal of this size is clearly antitrust,” noted analysts with Sterne Agee. Areas with the largest combined market share include Pressure Pumping (40%), Completion Equipment & Services (50%), Logging-While-Drilling (45%), and Drill Bits (41%). “While there could be some forced divestitures in these areas, we do not believe it would prevent a deal from happening,” the analysts continued.

As Halliburton and Baker Hughes are “two of three "relevant" competitors (with SLB) across several product lines globally,” Jefferies analysts said, resistance from significant customers and the Department of Justice is likely.

“While our first reaction was that this could not happen without substantial divestitures, one should consider that Halliburton and Baker Hughes have already put a lot of work into it and have probably retained some of the best anti-trust lawyers in the country. However one should also consider that Halliburton has historically been no friend of the left and there is likely to be a heavy review on the deal perhaps prompted by the current administration. This could be prompted by complaints from oil company customers,” noted Cowen and Company analysts.

Any deal struck—whether a complete buyout or full of divestitures—is sure to be felt across much of the oilfield services industry.

“Should the HAL-BHI combination occur, we imagine it can yield opportunity for global competitors including WFT, NOV and GE,” noted Jefferies analysts. “It could also cause further consolidation among secondary players.”


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