Baker Hughes to Buy Back Stock with Merger Breakup Fees

05/02/2016 9:26 am EST


Michael Berger

President & Founder,

The merger that would have combined the world’s second- and third-largest oil-field services firms has been called off and Michael Berger, Associate Editor of, who discusses both stocks’ potential post-breakup.

After weeks of speculation, the merger between Halliburton Company (HAL) and Baker Hughes Incorporated (BHI) was called off. The merger would have combined the world’s second- and third-largest oil-field services firms.

The merger, once valued at nearly $35 billion, faced opposition from regulators who said the combination would substantially lessen competition across a broad spectrum of product and service lines.

The regulators also said that the merger would leave the buyer dependent on Halliburton for services that are crucial to the businesses being divested and these product lines would fail to replicate the competition.

Faced Opposition on Multiple Continents

This announcement is not too surprising after the Justice Department filed a lawsuit to block the merger in early April. The merger not only faced opposition in the United States but from regulators in Europe as well.

Haliburton will now pay Baker Hughes a $3.5 billion termination fee by May 4th.

Buy on Weakness

Although the combination of the two companies would have been a catalyst for shareholders, we remain favorable on both BHI and HAL due to our bullish long-term outlook on North America's energy services market.

Baker Hughes is left with a company that has an incredibly well financed balance sheet and continued attractiveness from an acquisition standpoint. The company’s shareholders stand to benefit from the Justice Department’s break up of this merger.

Even after accounting for the substantial termination fee, Halliburton is one of the cheapest stocks in the energy services market. While the $3.5 billion termination fee will be a headwind for the company, this has already been financed through the company’s recent debt offering in anticipation of the merger.

Buying Back Stock and Debt with Breakup Proceeds

Shortly after the merger was cancelled, Baker Hughes announced that it would buy back shares totaling $1.5 billion and debt totaling $1 billion.

The company said it would fund these transactions from the proceeds of the breakup fee. Baker Hughes also said it plans to refinance its $2.5 billion credit facility, which expires in September 2016.

Baker Hughes plans to simplify its organization to save $500 million annually. The restructuring will focus on well construction, including drilling services, drill bits and completions, and production services, including artificial lift and production chemicals.

Up More than 20% Since DOJ Lawsuit

The market reacted favorably to the Justice Department’s lawsuit and both HAL and BHI are up more than 20% since April 6th.

At current levels, HAL is trading in overbought territory and BHI’s momentum is trading near overbought territory. We expect to see near-term weakness in shares of BHI and HAL and we would use this weakness as an opportunity to buy two stocks with significant growth potential.

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