Halliburton to buy Baker Hughes for $35bn

January 2015 | DEALFRONT | MERGERS & ACQUISITIONS

Financier Worldwide Magazine

On 17 November, Halliburton Company and Baker Hughes Incorporated announced that they had entered into a definitive agreement which will see Halliburton acquire its rival for approximately $35bn in cash and stock.

The transaction, which is expected to close in the second half of 2015, is valued at $78.62 per Baker Hughes share, representing an equity value of $34.6bn and enterprise value of $38bn. The agreed price also represents a 47 percent premium based on Halliburton’s closing price on 12 November 2014, the day before Baker Hughes publically confirmed that it was engaged in takeover talks with Halliburton. Negotiations between the two firms began in mid-October.

The deal will see Baker Hughes’ shareholders receive 1.12 Halliburton shares plus $19 in cash for each Baker Hughes share held. Accordingly, Baker Hughes shareholders will control around 36 percent of the stock in the combined company. Halliburton’s $78.62 a share offer values Baker Hughes at 8.1 times 2014 earnings before EBITDA. Halliburton will finance the cash element of the deal by utilising a combination of cash on hand and fully committed debt financing.

The agreed price represents a 47 percent premium to Baker Hughes’s stock market value on Wednesday 12 November, the day before press reports of the potential deal first appeared. As such, the price of the transaction represents the highest premium paid in any deal of at least $20bn in the past decade.

Once completed, the newly merged company will have a transformative effect on the oilfield services sector, creating an industry powerhouse. The two companies, the second and third largest firms in the sector, will be ideally placed to take on industry leader Schlumberger NV moving forward.

Both Halliburton and Baker Hughes felt compelled to pursue a deal given the significant shift seen in the oil sector in 2014. Slowing demand for oil, and increased competition in the sector, precipitated a drop in oil prices in late 2014. Though prices had been declining slowly throughout the year, in October the drop was more dramatic.

The deal has won the approval of the boards of both companies, but some commentators expect the transaction to encounter resistance from antitrust authorities. To allay the fears of regulators, Halliburton has confirmed that it is willing to shed a number of assets across Asia, Europe and the Americas. The units identified as suitable for divesting would generate revenue of around $7.5bn, and the company is confident that this asset shedding would satisfy regulators. In the event that the deal does not win regulatory approval, Halliburton will be required to pay a $3.5bn break fee to Baker Hughes.

In a statement announcing the deal, Halliburton’s chairman and chief executive Dave Lesar said “We clearly would not have done this deal if we didn’t believe it was achievable from a regulatory standpoint. We are absolutely confident that we’re going to get this thing done.” He added that the combination with Baker Hughes would “create a bellwether global oilfield services company and offer compelling benefits for the stockholders, customers and other stakeholders of Baker Hughes and Halliburton. The transaction will combine the companies’ product and service capabilities to deliver an unsurpassed depth and breadth of solutions to our customers, creating a Houston-based global oilfield services champion, manufacturing and exporting technologies, and creating jobs and serving customers around the globe.”

Once combined, the new Halliburton would employ more than 136,000 employees and operate across more than 80 countries. Given the significant overlaps between the two companies, it is likely that the merged business will be forced to lay off some staff. The newly combined company is expected to achieve operating cost savings of nearly $2bn a year. Halliburton has confirmed that the acquisition will add to its cash flow by the end of the first year after closing, and to earnings by the end of the second year.

Martin Craighead, chairman and chief executive of Baker Hughes, said “This brings our stockholders a significant premium and the opportunity to own a meaningful share in a larger, more competitive global company. By combining two great companies that have delivered cutting-edge solutions to customers in the worldwide oil and gas industry for more than a century, we will create a new world of opportunities to advance the development of technologies for our customers. We envision a combined company capable of achieving opportunities that neither company would have realised as well – or as quickly – on its own, all while creating exciting new opportunities for employees.”

Richard Summerfield