In case you missed it, Halliburton (HAL) is abandoning their $28 billion take-over offer for competitor Baker Hughes (BHI), when Crude oil was 40% higher near $75. It’s interesting that BHI is basically trading at the levels where it was in the days prior to the deal announcement in mid November 2014, while HAL is down about 25%. Larger competitor Schlumberger (SLB), who was at the heart of HAL’s effort to better compete with their buy of BHI , is down about 20% during the same period.
This deal has faced a huge amount of scrutiny from the get go, which is one reason for the unusually large breakup fee, but as we have mentioned on a few occasions on the site, BHI might make out better if the deal was scuttled, from November 2015:
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.
This morning the Finacial Times took a crack at some potential outcomes:
Immediate concerns about Baker Hughes’ future will be eased by the imminent arrival of $3.5bn in cash, but Martin Craighead, its chief executive, also has decisions to make. Can Baker Hughes on its own raise its North American margins to Halliburton’s level? Should it take the cash windfall and invest in worldwide expansion?
Maybe more likely, another bid comes in:
There is another potential option, though, which is that another bidder might come in. General Electric built up its oil services business with a series of deals, some of them completed when crude prices were much higher than they are today. Its revenues from products and services for the oil and gas industry were $16.5bn last year, slightly larger than those of Baker Hughes.
GE was known to be interested in potentially picking up some of the businesses that Halliburton would have been forced to sell for the acquisition to go ahead.
A deal to buy the whole of Baker Hughes would be ambitious. It would be the largest — in nominal terms — acquisition in GE’s history. But now Baker Hughes is out on its own again, it is a possibility that both companies will be able to consider.
Either way, BHI seems, at least from a balance sheet standpoint, in a pretty decent spot no matter what happens in Crude oil next. With a $21 billion market cap, the $3.5 billion breakup fee has always served as an embedded put that has this year ranged between 23% and today’s current 17% of the company’s market cap, with the payment nearly equal to their $4 billion in debt. Arbs, if there are any left will have to unwind short HAL, long BHI positions, but event traders may step back into BHI, given their embedded put option. That money might now be converted to a long call.