Baker Hughes and Halliburton merger breaks up over antitrust issues
On May 1, Baker Hughes (BHI) and Halliburton (HAL) officially terminated their merger agreement. You can read about the merger agreement in our series titled Analysis of the Baker Hughes and Halliburton Transaction. Halliburton will pay Baker Hughes the $3.5 billion reverse termination fee, which should help offset some of the downside on the transaction.
This deal was always problematic
Announced over 18 months ago, the merger of Baker Hughes and Halliburton was always going to be difficult for antitrust regulators to approve. The merger was a combination of the second- and third-largest players in the oilfield services space, and those types of deals are invariably tough to get through unless the Market shares are very low. The US antitrust authorities issued a second request, and the European Union antitrust regulators launched an in-depth review. While Halliburton had come up to $7.5 billion in divestitures, that apparently wasn’t enough.
If you look at the above chart, which tracks the Baker Hughes–Halliburton merger arbitrage spread from pre-deal to today, you can see the Market was losing faith this deal could close. The arbitrage spread was trading close to $17 on Friday, when rumors saying the deal wasn’t going to close spread throughout the press. Assuming the spread goes back to pre-deal levels, the spread could move to $21, leaving about another $4 of downside from the current level. That said, the reverse termination fee is worth about $8 a share, so the downside could be less.
Other merger arbitrage resources
Other important merger spreads include the deal between Cigna (CI) and Anthem (ANTM). For the basics on risk arbitrage investing, please refer to Merger Arbitrage Must-Knows: A Key Guide for Investors.
Investors who would like diversified exposure to the financial sector can look at the Energy Select Sector SPDR Fund (XLE).