- Halliburton and Baker Hughes have killed the merger.
- This could be a great opportunity for General Electric to buyout most or all of Baker Hughes at a decent price.
- In light of recent history, it is unlikely that another major oilfield services company would consider stepping into Halliburton’s shoes.
Halliburton (NYSE:HAL) and Baker Hughes (NYSE:BHI), the world’s second and third-largest oilfield services companies respectively, have recently called off their merger, and General Electric (NYSE:GE) could turn out to be an unlikely winner.
Halliburton and Baker Hughes agreed to join hands in 2014 in order to compete better with the industry leader Schlumberger (NYSE:SLB). But the merger, which was initially valued at $34.6 billion, faced above-average regulatory risk from day one, as I wrote previously in 2014. The deal could have effectively removed the third-largest oilfield services company, Baker Hughes, from the global stage. This could have made the oilfield services industry less competitive, which could result in higher pricing levels. Not surprisingly, the two companies faced significant pressure from regulators in the US due to antitrust concerns.
Halliburton and Baker Hughes set April 30 as the deadline to either complete the transaction or walk away from the deal. But the chances of meeting that deadline dimmed earlier this month when the US Justice Department moved to block the merger by filing a lawsuit. The two were still waiting to hear additional details from European antitrust regulators who were also concerned about how the merger would damage competition in the EU. But on Monday, Halliburton and Baker Hughes officially announced “termination of merger agreement”.
Baker Hughes investors are disappointed. Following the announcement, Baker Hughes stock fell a little over 2% when the markets closed on Monday. But this could be an opportunity for GE to swoop in and buy either some or all of Baker Hughes on the cheap.
GE, one of the world’s leading industrial conglomerates, has been positioning to become one of the biggest beneficiaries of the oil downturn. The persistent weakness in energy prices has wreaked havoc on the entire sector, with the SPDR Energy Select Sector ETF (XLE), the industry’s benchmark fund which tracks oilfield services companies including the big three (SLB, HAL, BHI), oil majors like Exxon Mobil (NYSE:XOM), pure play oil producers like ConocoPhillips (NYSE:COP) and refiners like Valero Energy (NYSE:VLO), has fallen by nearly a third over the last twelve months. GE is believed to be using this weakness as an opportunity to expand its oil and gas footprint.
During recent conference calls, the company’s management also said that they have been actively looking in the oil and gas space for acquisition opportunities. Last month, Jeff Immelt , GE’s CEO said, while discussing M&A, that there are a “bunch of different segments in the Oil & Gas business that are attractive as we look at it today.” GE was already believed to be the one of the front-runners to buy assets from Halliburton. The oilfield services company originally planned to sell $7.5 billion of annual revenue generating assets to satisfy antitrust concerns.
A Baker Hughes acquisition would also be in line with GE’s plans to grow its oil and gas business, which is a part of its broader strategy of expanding in manufacturing while reducing exposure to GE Capital. This segment, which used to be a small part of GE, has now grown to become the fourth-largest unit as the company went on a shopping spree, spending more than $10 billion on buying energy assets over the last few years. Over the past decade, GE has undertaken nine oil and gas acquisitions valued at above $500 million each, including the 2013 purchase of Liftkin Industries, which specializes in making oil pumps, for $3.24 billion.
GE, however, is still a small player when compared against Schlumberger, Halliburton or Baker Hughes. According to one estimate, GE is not even ranked as one of the ten largest oilfield services and equipment companies in the world. However, by buying Baker Hughes, GE can potentially propel the position of its oil and gas unit as the third largest player in the global oilfield services industry, surpassing some of the biggest companies, such as Weatherford International (NYSE:WFT).
Moreover, GE may not have to pay a hefty premium of 50% to 60% to buy Baker Hughes, as Halliburton agreed to do back in 2014, given Baker Hughes is already reeling with the impact of an unsuccessful merger and the lower-for-longer oil price outlook has been firmly established. Once Baker Hughes receives $3.5 billion in breakup fees from Halliburton, GE could come forward and make a bid for Baker Hughes at around $25 billion to $29 billion. That would reflect a premium of 20% to 40% from the most recent close, as per my rough estimates.
This price tag may sound a lot to some. GE can shell out $10 billion on M&A, based on its budgeted target for the next couple of years. Though it can go above this target, the company may have to cut back on stock buybacks. That may not go down well with shareholders. But in this case, GE can always ease shareholder concerns by reselling some parts of Baker Hughes to prospective buyers, such as the private equity firm Carlyle (NSDQ:CG) or oilfield equipment maker National Oilwell Varco (NYSE:NOV).
Furthermore, in light of recent history, it is also unlikely that another major oilfield services company would consider stepping into Halliburton’s shoes. Theoretically, Schlumberger and Weatherford International – the world’s largest and fourth-largest oilfield services companies respectively – can bid for Baker Hughes, but we can say with a fair amount of certainty that these companies will face significant regulatory hurdles in US and Europe. GE, on the other hand, does not face similar risk since it is a small player on the global stage (as mentioned earlier)
Moreover, Schlumberger has already made a big acquisition in the downturn by buying Cameron International for $14.8 billion. That reduced the chances of an even bigger deal. Weatherford’s shareholders, on the other hand, have already shown their distaste for a merger that could potentially hurt the company’s balance sheet. Back in Sep., when Weatherford proposed an equity and debt offering to raise cash for, among other things, “potential acquisitions”, the company’s shares tanked, forcing it to scrap the equity and debt sale.
Halliburton and Baker Hughes have officially killed the merger, but this could be an opportunity for GE. The company could move to buy some or all of Baker Hughes at an attractive price. Such a move will be in line with its broader expansion strategy and will give the company an opportunity to emerge as the third largest oilfield services company from the energy downturn. It is also unlikely that it will face a significant competition for Baker Hughes from another major oilfield services company. I believe this could be the next big catalyst for GE stock.