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Halliburton, Baker Hughes deal collapse could trigger moves

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The collapse of the proposed tie-up between oilfield services giants Halliburton and Baker Hughes may trigger a wave of consolidation and further cost cutting as the industry reels from low oil prices.

Baker Hughes on Monday announced plans to shed $500 million in costs after the U.S. Justice Department blocked the company’s sale to rival Halliburton on antitrust concerns.

Now, some analysts are anticipating a fresh round of mergers, acquisitions and restructuring to cope with low cash flow from crude oil’s decline. Halliburton and Baker Hughes, however, are viewed as financially resilient enough to ride out the cycle.

“The initial thought was that divestitures from the deal would shape the profile of the industry with many players waiting to see how the process would shake out,” Deutsche Bank analyst Mike Urban wrote in a research note to investors on Monday. “With the deal now called off, we believe it could set off a wave of industry restructuring/consolidation.”

Many analysts expect oil prices, now in the mid-$40s a barrel, to edge back to the $50-to-$60 range by the second half of the year, but that would still not be enough to make many companies profitable on their own, experts say.

Baker Hughes will immediately begin cost-cutting measures.

“The company is evaluating broader structural changes to further significantly reduce costs and improve efficiency, which will allow it to better serve the rapidly shifting global market,” Baker Hughes said in a statement on Monday.

Halliburton will pay a $3.5 billion breakup fee to Baker Hughes, which will in turn devote $1.5 billion of that to share buybacks and $1 billion to repay debt.

The breakup fee is fairly generous and could strengthen Baker Hughes, says Jim Milligan, a natural resource analyst at Olivetree Securities.

Though investors anticipated potential opposition to the tie-up from the moment it was revealed in late November 2014, the government’s exuberant reaction to the merger’s demise underscores the risks big companies face at the altar.

“The hurdle is higher because it’s more of an active DOJ, and the Obama administration is on its way out, so obviously it wants to leave more of a footprint,” Milligan says.

There was no way the Justice Department would have authorized Halliburton’s acquisition of Baker Hughes, a deal once valued at $34 billion, Deputy Assistant Attorney General David Gelfand of the Justice Department’s Antitrust Division told reporters in a conference call on Monday.

The deal “would have harmed energy companies and would have harmed American consumers,” he says.

Even Halliburton’s proposal to sell certain assets — details of which have not been revealed — was insufficient because it could expose consumers to risk if the acquirer could not run the assets efficiently, Gelfand said. Rising costs would be passed to consumers through higher gasoline prices.

Baker Hughes shares (BHI) fell 2% to $47.40. Halliburton (HAL) rose 2% to $42.05.

The Obama administration hailed the deal’s demise, trumpeting the growing list of mergers blocked as regulators increase scrutiny of potentially anti-competitive deals. The administration has killed more than 30 “anti-competitive mergers,” Gelfand says. In total, some 130 mergers have been blocked or altered through settlements such as divestitures, he said.

The Halliburton acquisition of Baker Hughes “was not fixable given the breadth of anti-competitive effects,” Gelfand says. He rejected the notion that officials are intently taking a more aggressive approach to mergers.

Halliburton will discuss the deal’s demise in an earnings call Tuesday. The company has already announced more than 23,000 job cuts since oil prices began descending in late 2014.  Baker Hughes has shed at least 7,000.

The companies had previously vowed to fight the Justice Department but concluded the strategy would be fruitless.

“While both companies expected the proposed merger to result in compelling benefits to shareholders, customers and other stakeholders, challenges in obtaining remaining regulatory approvals and general industry conditions that severely damaged deal economics led to the conclusion that termination is the best course of action,” Halliburton CEO Dave Lesar said Sunday in a statement.

Both companies are reeling from the crushing force of rock-bottom oil prices that have hammered the profits of their key customers, exploration and production companies. Oil prices dipped below $30 per barrel in early 2016 before recovering into the mid- to upper $40s in recent trading days.

Halliburton estimated last month that North American spending on drilling and well completion would fall by 50% in 2016, worse than 2015’s 40% drop. Halliburton’s first-quarter revenue fell 17% to $4.2 billion, compared with the same period a year earlier.

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