Oil services giant
After reports of a merger surfaced last week, Baker Hughes initially appeared unwilling to negotiate a deal potentially forcing Halliburton to take a hostile campaign directly to shareholders. However, Monday's merger proposal, agreed by both companies' boards of directors, shows Baker Hughes was willing to negotiate at the right price. Halliburton, meanwhile, appears confident enough in the strategic rationale of a merger it is paying a significant premium to get a deal done expediently.
Baker Hughes shareholders will receive $19 a share in cash and the remainder of the consideration in stock at fixed exchange ratio of 1.12 Halliburton shares, giving them 36% of the stock in the combined company. Halliburton's $78.62 a share offer values Baker Hughes at 34.6 billion or 8.1 times consensus 2014 earnings before interest, taxes, depreciation and amortization (EBITDA).
Halliburton shares were falling over 10% in late afternoon trading on Monday, while Baker Hughes shares were rising nearly 10%.
FBR Capital Markets analyst Thomas Curran ascribed Halliburton's plunge to investors' disappointment with projected earnings and cash flow growth for the combined company, the size of antitrust concessions, and the positioning of merger arbitrage funds who the analyst said are likely buying Baker Hughes shares and selling short Halliburton shares.
“This brings our stockholders a significant premium and the opportunity to own a meaningful share in a larger, more competitive global company," Martin Craighead, Chief Executive of Baker Hughes, said in a statement. "We envision a combined company capable of achieving opportunities that neither company would have realized as well – or as quickly – on its own, all while creating exciting new opportunities for employees," Craighead added.
"Our stockholders know our management team and know we live up to our commitments. We know how to create value, how to execute, and how to integrate in order to make this combination successful," Halliburton Chief Executive Dave Lesar said in a statement.
Halliburton expects that its merger with Baker Hughes will yield nearly $2 billion of operating synergies annually and will help the company increase its offerings to customers, while also boosting returns of capital to shareholders. If completed, the deal would create the oil services industry's second-largest company to
Chris Pultz, a portfolio manager of the Kellner Merger Fund, said that overall synergy forecasts were higher than expected, but he added that Halliburton used more stock than he forecast.
"I was a little surprised by the amount of stock they used," Pultz said in a telephone interview. He also noted Baker Hughes would fill in gaps Halliburton has in its artificial lifts and production chemicals businesses.
Because both companies have overlapping businesses in many geographies, Halliburton has agreed to divest businesses that generate up to $7.5 billion in revenue if required by regulators. Halliburton, however, said it believes divestitures will be significantly less. The company also has agreed to pay a $3.5 billion termination fee if a deal is cancelled on antitrust.
That breakup fee, amounting to nearly 10% of the overall transaction value, was a key piece of getting Baker Hughes to negotiate a deal, a documents show. It also is one of the largest fees in recent memory, eclipsed only by
"This is one of the largest that we have seen," Elai Katz, an antitrust partner at Cahill, Gordon & Reindel said in a telephone interview. Katz expects a long antitrust review, which is likely to look at antitrust issues product-by-product.
Pultz, the Kellner PM, believes integrated oil giants could oppose the deal if they believe the combined company will be able to squeeze out price increases, potentially complicating an antitrust review. "You may see some complaining from ExxonMobil and the like," Pultz said.
The combined company will maintain the Halliburton name and continue to be traded on the New York Stock Exchange under the ticker symbol “HAL." Dave Lesar will be CEO of the combined company, and Halliburton will expand its board to 15 members, including three directors from the board of Baker Hughes, at the deal's close.
Dave Lesar will continue as Chairman and Chief Executive Officer of the combined company. Following the completion of the transaction, expected in the second half of 2015, the combined company’s Board of Directors will expand to 15 members, three of whom will come from the Board of Baker Hughes.
After threatening a hostile slate of board nominees to Baker Hughes board last week, Halliburton withdrew its slate on Monday.
Halliburton will finance the $19 a share cash portion of Monday's deal through a combination of cash on hand and a committed debt financing. The company expects to maintain investment grade bond ratings and said a merger will help it increase dividend payments and share buyback activity.
Credit Suisse and BofA Merrill Lynch are advsing Halliburton, while Baker Botts and Wachtell, Lipton, Rosen & Katz are serving as legal counsel. Goldman, Sachs is serving as financial advisor to Baker Hughes, while Davis Polk & Wardwell and Wilmer Cutler Pickering Hale and Dorr are serving as legal counsel.
