Summary: Halliburton and Baker Hughes have closed a deal that will merge the two companies to create the oil service industry’s second largest company.
Halliburton, the oil services giant, has entered a deal to purchase Baker Hughes for $78.62 a share in a cash and stock merger. The deal, according to MSN, will avoid a ”hostile effort,” and will also help both companies handle falling oil prices. Halliburton will pay an over 40% premium to Baker Hughes shareholders, and is offering substantial stock in the combined company to finalize the deal.
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Halliburton’s team of advisers includes Credit Suisse and BofA Merrill Lynch, as well as Baker Botts and Wachtell, Lipton, Rosen & Katz, both of which are to serve as legal counsel. For Baker Hughes, Goldman Sachs is serving as financial advisors, and Davis Polk & Wardwell and Wilmer Cutler Pickering Hale and Dorr serve as legal advisors.
At first, Baker Hughes seemed unwilling to negotiate a sale, which would have forced Halliburton to take a hostile campaign to shareholders. On Monday, however, the merger proposal revealed to the public demonstrated that Baker Hughes was very willing to negotiate a deal for the right amount. Halliburton is seemingly so confident in the merger that it is paying a high premium to get the deal done more quickly so that the companies can move forward.
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Shareholders of Baker Hughes will receive $19 per share in cash. The remainder of the consideration will be provided in stock at a fixed exchange ratio of 1.12 Halliburton shares. This will give shareholders 36% of the stock in the combined company. Halliburton’s $78.62 per share offer values Baker Hughes at $34.6 billion. That’s 8.1 times the consensus 2014 earnings before amortization, depreciation, taxes and interest.
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In pre-market trading on Monday, Halliburton shares were falling over 5%, and Baker Hughes shares were rising in excess of 16%. Martin Craighead, the 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. 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.”
Dave Lesar, the chief executive of Halliburton, stated, “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 predicts that the merger will yield close to $2 billion of operating synergies each year. It also expects that the company will be able to increase offerings to customers and improve returns of capital to shareholders. If the deal is completed, it will be the oil services industry’s second-largest company, second to Schlumberger, which has $51.8 billion in annual revenue on a pro-forma basis.
Baker Hughes’ most valuable assets are its chemical and pump businesses, according to Chris Pultz, a portfolio manager with the Kellner Merger Fund. He explained that Baker Hughes would close gaps in Halliburton’s artificial lifts and production chemicals businesses. He added, “There is definitely strategic value here.”
Both Halliburton and Baker Hughes have overlapping businesses in many areas. Halliburton agreed to divest businesses that generate up to $7.5 billion in revenue should regulators require it. However, Halliburton predicts that any divestitures will be less. In addition, it will pay a $3.5 billion termination fee if a deal is cancelled due to antitrust.
The new combined company will keep the Halliburton name, and will continue to be traded on the New York Stock Exchange under “HAL.” Dave Lesar will serve as CEO, and Halliburton’s board will increase to 15 members, to include three directors from Baker Hughes.
Although Halliburton threatened a hostile slate of board nominees last week, it was withdrawn on Monday. Halliburton will finance the $19 a share cash part of the deal through cash the company has on hand, as well as a committed debt financing. Halliburton predicts it will maintain investment grade bond ratings, and said a merger will assist it with increasing dividend payments and sharing buyback activity.
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