Halliburton to buy Baker Hughes for $34.6billion, merger agreed

November 19, 2014 | Company Operations, Mergers, Acquisitions & JVs

London, UK | – American oil drilling giant Halliburton Corporation  said on Monday it will buy Baker Hughes Inc. another American oil drilling company  for about $35 billion in cash and stock, creating an oilfield services behemoth to take on market leader Schlumberger NV as customers curb spending on falling oil prices.

Halliburton expressed confidence that the tie up of the No. 2 and No. 3 players in the services industry would clear regulatory hurdles, saying it was prepared to shed assets to mollify antitrust concerns that could arise in Asia, Europe and the Americas.

The deal, the second biggest in the U.S. energy sector this year, could create a company with more revenue than Schlumberger. With oil prices down by a third since June, demand for drilling services has slipped and stock prices across the energy sector have suffered. That has stoked chatter among executives and bankers about acquisition opportunities companies could take advantage of to weather the downturn.

Halliburton Chief Executive Dave Lesar said the combined entity would be more resilient and able to offer a wider suite of products globally. “Stronger in any market condition is better,” he told Reuters. “We are in a cyclical business.”

Halliburton said it was ready to divest businesses that generate revenue of $7.5 billion to satisfy regulators and would pay Baker Hughes $3.5 billion if the deal was not cleared.

“At the end of the day, we wouldn’t have done this deal if we didn’t believe it was achievable from a regulatory standpoint,” Lesar said on a conference call. Baker Hughes shares were trading well below the offer, suggesting that investors were not so sure of regulatory approvals. But Kurt Hallead, oilfield services analyst at RBC Capital Markets, said the risk of the deal failing was low.

“I think the assessment on divestitures matches up pretty closely with the work we’ve done. I don’t anticipate there being any roadblocks,” he said. The transaction would unite the two companies based in Houston and create an entity dominant in U.S. onshore services such as hydraulic fracturing and horizontal drilling.

While there are at least seven major services where there is an overlap between the two companies, the deal would fill gaps in two product lines in Halliburton’s portfolio – product chemicals and pumps that boost output from wells.

Baker Hughes shares rose nearly 11 percent to $66.44 each on Monday, well short of Halliburton’s offer of $80.69, based on Friday’s close. After a steep run up last week, Halliburton shares were down 8 percent at $50.60. Schlumberger was up 0.6 percent at $95.85.

Talks between the two companies started over a month ago and came to a head on Friday when Halliburton threatened to replace Baker Hughes’s board after its initial offer was rejected.

Baker Hughes shareholders will get 1.12 Halliburton shares plus $19 in cash for every share held, and own 36 percent of the combined company. Baker Hughes will get three seats on the combined company’s 15-member board.

The combined company’s 2013 revenue was $51.8 billion on a pro-forma basis, more than Schlumberger’s $45.3 billion. But Schlumberger’s market capitalization of $122.6 billion is twice as large as the united company.

Credit Suisse and BofA Merrill Lynch advised Halliburton and Goldman, Sachs & Co advised Baker Hughes.

Meanwhile, Halliburton and Baker Hughes have reached a definitive agreement, under which Halliburton will acquire all outstanding shares of Baker Hughes in a stock and cash transaction.

The transaction is valued at US$ 78.62 per share, representing an equity value of US$ 34.6 billion. Upon completion of the transaction, Baker Hughes stockholders will own approximately 36% of the combined company.

Both firms operate within the coalbed methane (CBM) industry. Baker Hughes notes on its website that it has been an “integral” part of CBM development from the nascent days of the industry. Halliburton, meanwhile, has pioneered key CBM technologies that help reduce drilling time and enhance gas production from coal seams.

In separate comments, Dave Lesar, Chairman and CEO, Halliburton said “We are pleased to announce this combination with Baker Hughes, which will 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.

“The stockholders of Baker Hughes will immediately receive a substantial premium and have the opportunity to participate in the significant upside potential of the combined company. 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. We expect the combination to yield annual cost synergies of nearly US$ 2 billion. As such, we expect that the acquisition will be accretive to Halliburton’s cash flow by the end of the first year after closing and to earnings per share by the end of the second year. We anticipate that the combined company will also generate significant free cash flow, allowing for the return of substantial capital to stockholders.”

While Martin Craighead, Chairman and CEO 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.”

Lesar concluded: “We believe that the expertise of both companies’ employees and leaders will be a competitive advantage for the combined company. Together with the people of Baker Hughes, we will establish a team to develop a detailed and thoughtful integration plan to make the post-closing transition as seamless, efficient and productive as possible. We look forward to welcoming the talented employees of Baker Hughes and are pleased they will be joining the Halliburton team.”