Halliburton: swallows Baker Hughes

Baker Hughes agreed Monday to be bought by oil services rival Halliburton in a $34.6 billion deal that comes as the sharp oil price fall spells a possible downturn in business for both.

Halliburton, the industry’s number two firm after giant Schlumberger, sealed the deal after briefly threatening a hostile bid over the weekend when Baker Hughes would not bend to its terms.

It was the first sign of what some analysts expect will be a consolidation trend in the oil patch, as lower crude prices force big companies to cut back on exploration and production spending.

It could also propel the two past crosstown Houston rival Schlumberger. Last year Schlumberger reported revenues of $45 billion, while the combined revenues of Halliburton and Baker Hughes were nearly $52 billion.

But the deal could raise anti-trust concerns, the companies acknowledged, and Halliburton said it was prepared to divest businesses that produce up to $7.5 billion in revenues if necessary to satisfy regulators.

Bank of America said that Schlumberger and post-merger Halliburton would control about 80 percent of the oil services market.

Martin Craighead, the chairman and CEO of Baker Hughes said the deal would create “a larger, more competitive global company.”

“By combining two great companies that have delivered cutting-edge solutions to customers in the worldwide oil and gas industry for more than a century, we will create a new world of opportunities to advance the development of technologies for our customers.”

Halliburton will pay Baker Hughes shareholders $19 in cash and 1.12 Halliburton shares for each of their shares, valuing Baker Hughes shares at $78.62 according to their joint announcement.

That amounts to a 61 percent premium on where Baker Hughes shares were trading, around $48.70, when the news leaked out last Thursday that the two were in merger talks.

The shares finished Friday at $58.75 before Baker Hughes rejected Halliburton’s bid, sparking threats of a hostile takeover.

On Monday, Baker Hughes shares surged 8.9 percent to $65.23, while Halliburton shares fell 10.6 percent to $49.23, around where they stood before the pending deal was first reported.

Schlumberger shares meanwhile added 0.7 percent to $95.63.

The two said their business lines were “highly complementary” but that efficiencies from combining the businesses would save $2 billion annually in costs.

They would also become the driving power in the hot fracking industry, with up to a 36 percent market share according to reports.

Halliburton’s Dave Lesar will continue as chairman and chief executive of the combined company, which will operate and trade as Halliburton.

The deal was announced under the cloud of falling oil prices, down more than 25 percent since June and now at their lowest levels in four years.

A combination of slow global growth, the huge surge in production mainly from shale resources in North America, and the rise in production in places like Iraq and Libya have flooded the market with crude.

That is expected to press major oil companies to trim spending on exploration and production, which spells tougher times for oil services firms.

At the end of October ConocoPhillips said it would cut investment over the next year due to the fall in oil prices. Other companies are expected to announce similar reductions.

Analysts said the deal could pave the way for more takeovers in the industry as falling oil prices put pressure on exploration companies to cut spending.