Last night on CNBC’s Fast Money we discussed some yet to close large m&a deals announced this past year, where the target is trading well below the typical “closing risk” discount:
I was asked to weigh in on Baker Hughes (BHI), which a year ago agreed to be acquired by larger competitor Halliburton (HAL) for $35 billion, when crude oil was trading at $75! Terms from Nov 17, 2014 press release:
Baker Hughes Stockholders to Receive 1.12 Halliburton Shares Plus $19.00 in Cash for Each Share They Own
Transaction Values Baker Hughes at $78.62 per Share as of November 12, 2014
Today crude is trading just above $40, and HAL & BHI are both down about 25% from the merger announcement. BHI now sports a market cap of just $22 billion, and HAL’s market cap at $32.5 billion is now below the price agreed upon for BHI. As I mentioned in the video above, the deal has a whopping $3.5 billion break-up fee in the event the deal is blocked by regulators, which could come in handy as a year on it seems that the deal is getting held up European regulators, and both companies in late September extended the timing of the U.S. Department of Justice review to December 15th.
The knee jerk reaction would be to sell BHI if the deal was blocked as arbs would need to unwind the trade (long BHI, short Hal), but after the initial selling I suspect investors might consider all of the potential uses for the $3.5 billion break-up fee, share buybacks or an acquisition of their own. I suspect that BHI could be in one of those fairly rare situations where a negative regulatory outcome on their proposed merger could yield multiple positive outcomes, while a positive regulatory outcome would merely yield one positive outcome.