Since the Halliburton – Baker Hughes merger was announced more than a year ago, anti-trust concerns have plagued the deal’s path to closing. Regulators from the US DOJ to the EU have scrutinized the deal, seeking more information than normal from the companies given their overlap and size and demanding divestitures to improve competition.
On Monday, a new challenge emerged from Brazil, where the competition committee has said the consolidation will lead to price increases for the combined company’s services.
Headache Becomes A Migraine
In June we wrote that Wall Street was concerned the deal might be falling apart. Typically, the deal risk spread (measured by the difference between the implied deal value and the target’s stock price) will narrow as the closing date draws closer. But the deal spread on the Halliburton Baker Hughes transaction has been widening during 2H15 as regulatory risk rises.
The spread is spiking today on new concerns from Brazilian regulators. Although all oil and gas stocks are underperforming today as oil prices plummet, Baker Hughes is underperforming its peers by about 3.5% on this new challenge. Halliburton’s bid and the pending merger are supporting Baker Hughes’ share price, and Baker Hughes’ stock could drop as much as 25% if the deal was blocked and they were forced to go it alone.
In a statement issued today, Brazil’s CADE court (their anti-trust regulator) joined in the chorus of concerns, writing in an official communique: “various elements suggest that the transaction may result in price increasing in several markets related to the company’s playing field, since the sector has high barriers to entry and there would be a situation of lower competition in the post-merger scenario.”
Petrobras is Halliburton’s biggest customer in Brazil, and the Brazilian regulator is motivated to do what is NOC’s best interest.
The CADE statement went on: “CADE’s opinion also concluded that the company resulting from the transaction might concentrate market power and coordinate effects in the analyzed markets, since Halliburton and Baker Hughes can offer in a integrated manner (in packages) a wide range of services and products, in addition to the existence of a single competitor from their size and competitive technological capacity.”
CADE’s opinion will now be considered by the CADE Tribunal, which will be responsible for approving, blocking, or “adopting remedies.” The Tribunal’s deal may be applied unilaterally or following an agreement with the parties.
The deal was originally expected to close by year-end 2015, but this is no longer likely. Halliburton’s re-filing with the European Commission already pushed the deadline for regulatory approval out into January 2016.
Brazil’s challenge may delay the deal even further. The CADE Tribunal has a legal timeframe of 240 days after notification of the deal (which happened in July 2015) to decide. And that can be extended 90 days at the Tribunal’s discretion. So Brazil may not have a final answer for Halliburton until somewhere between mid-March and mid-June 2016.
Halliburton continues to make progress on the businesses it is required to sell for DOJ approval, with many speculating that GE is a front runner for a large part of the divestitures. If further asset sales are required to gain regulatory favor, the deal could be delayed further.
Divestitures are expected to close simultaneously with the larger transaction.