STRANDED? (IMAGE SOURCE: HALLIBURTON CORPORATE WEBSITE)
Both EU regulators and the U.S. Department of Justice laid out their concerns pretty clearly about the proposed merger between Halliburton and Baker Hughes. Morgan Stanley believes that there is a possibility that the deal might not go through and has therefore downgraded Baker Hughes to equal-weight from overweight. If the merger is not approved, HAL's $3.5B break-up fee could challenge its balance sheet. It would be helpful to look at the probability of the merger, as well as its effects if things don't go through. The deal is for 1.12x HAL shares for each BHI share, plus $19 cash. That implies BHI would transact at $54.14. The current price is $42.50, implying considerable uncertainty.
In November of 2014, Halliburton and Baker Hughes agreed to merge, pitching its "highly complementary product lines" and "nearly $2 billion in synergies". Over a year later, investors are becoming increasingly hesitant that the deal will go through.
The acquisition price for each Baker Hughes share is for 1.12 Halliburton shares plus $19 in cash. Halliburton would also inherit Baker Hughes's net debt of $1.7 billion. That deal would now value each Baker Hughes share at roughly $55 apiece, a sizable premium to its current trading price of only $42. As we'll discuss, there are plenty of reasons for the market to remain skeptical.
