This afternoon, the financial press is reporting that Halliburton (HAL) is in talks to buy Baker Hughes (BHI) in what would arguably be the most significant combination in the history of oil service and drilling.
The deal would combine the world’s second and third largest oil service contractors, and the combined market cap would be in range of $75bn. Halliburton currently employs 80,000 people and Baker Hughes employs 61,000 (two of the highest totals in the entire O&G industry).
The Wall Street Journal cited people close to the deal as saying that the talks are moving quickly. An Oilpro member has told us that Halliburton is attending an investor conference this week, and they cancelled 1×1 meetings following their group presentation – an indication that there is fire under the smoke here.
Shares of Baker Hughes soared on the news and were halted in afternoon trading. In after hours trading, Baker shares were bid above $60 per share, up 26% from levels early today (near $49) as traders buy this news.
With A $75 Billion Market Cap, The Combined Company Would Turn Competitive Dynamics Upside Down In Oilfield Services
This Deal Would Turn The Big 4 Into The Big 2
Based on current market values, the combined entity’s market cap would approach $75bn, still well below Schlumberger’s $124bn, but a lot closer. HAL’s market value today stands at $45bn and BHI’s is $25bn, and the deal would likely include a significant premium for BHI. By combining together, Baker and Halliburton would have the scale to challenge Schlumberger’s market leadership, which has been built through smaller acquisitions and internal investments in technology and organic growth.
With Weatherford at a market cap of about $12bn, this deal would effectively mean that the Big 4 service firms would become the Big 2 as the new HAL and SLB would be far larger than WFT once the deal is consummated.
Additional Consolidation Could Follow
Because of the drastic implications for competitive dynamics here, this deal could set off a round of oil service sector consolidation as companies look to build scale to improve competitiveness. Beyond the Big 4, there are basically no true diversified mid-cap service companies any longer – Superior Energy Services is probably the closest with a market cap of $3.6bn. Smaller companies may be forced to consolidate to offer a diverse package of services to compete with the integrated platforms of the Big 2 in this scenario.
Regulatory Approval Will Be A Big Hurdle For This Deal
Given the business overlap, particularly in the US onshore market, this deal will also likely receive some pretty serious scrutiny under the Hart-Scott-Rodino Act (HSR). The HSR act is anti-trust legislation designed to enable the Federal Trade Commission and the Department of Justice prevent business combinations that would create unfair competitive dynamics. A review process will be held before the deal is approved.
Should this deal move forward, one of the most interesting aspects is the timing. The oil service sector is arguably within reach of a multi-decade cyclical high.
Sure, shares of both Baker and Halliburton are down about 30% from recent highs due to the oil and broader equity market sell-off, but as shown below, shares are well above historical norms, as are most operating metrics.
Historically, consolidation in the sector has been more prevalent (and successful) around cyclical lows rather than cyclical highs. And based on the oil price downdraft and commentary from operators, it would appear that the industry is on the verge of cyclical decline.
The timing also begs the question of how this deal would get done in the current market. Halliburton has an enterprise value of around $51bn. With just $2bn of cash, they will probably need to use a combination of equity and debt to finance the deal (Baker has an enterprise value of $29bn and an equity value of $25bn). The markets are skittish right now, and it will be interesting to see what sort of financing Halliburton decides to use to fund the deal. The consideration paid to Baker will likely be a combination of cash and shares in the combined entity, allowing Baker shareholders to continue to participate in the upside of the ongoing business.
The original source for this post can be found here.