HAL.WD Halliburton

By Alison Sider 

Halliburton Co. and Baker Hughes Inc. are planning to call off their merger, once valued at nearly $35 billion, which encountered opposition on multiple continents from regulators who claimed that it would hurt competition in the oil-field services business.

The announcement of an end to the merger agreement could come as soon as Sunday evening, according to people familiar with the matter.

The deal to combine the world's second- and third-largest oil-field services firms after Schlumberger Ltd. appeared increasingly troubled since April 6, when the U.S. Justice Department filed a lawsuit to block it. The merger had also encountered opposition from regulators in Europe.

The companies had anticipated regulatory challenges when they originally struck their agreement in 2014, but repeatedly stressed that they felt the obstacles could be overcome, even as analysts and other experts questioned the risk.

The two sides previously set April 30 as the day when the agreement expired, allowing either to walk away from the deal. After Halliburton announced first-quarter operating results but postponed a discussion of its earnings until May 3, analysts speculated that the merger was in trouble.

Halliburton will have to pay a $3.5 billion break-up fee to Baker Hughes -- a condition of the merger agreement put in place in a nod to anticipated regulatory challenges.

The Justice Department suit argued that the deal would eliminate head-to-head competition in as many as 23 product lines, which would lead to higher prices and less innovation.

At the time, both companies were aggressive in their pledges to fight back, saying that they believed they could disprove the Justice Department's allegations in court. They sought to have the case heard in Texas, where some analysts said they'd be more likely to prevail.

While the companies' efforts to sell off business had left anti-trust officials unmoved, Halliburton moved forward in serious talks with Carlyle Group, a private-equity firm with a long track record of creating standalone businesses from the cast-offs of larger companies.

Halliburton announced late last week that it would take a $2.1 billion restructuring charge to its first quarter earnings, relating to severance costs from layoffs and writing of the value of some of its assets, like older fracking pumps that are no longer being used.

In the past, Halliburton has said it had to keep some excess infrastructure in place, despite the downturn, to be ready to integrate Baker Hughes and quickly ramp up as a combined company.

Thanks to the breakup fee, a newly independent Baker Hughes would be flush with cash, which some analysts have said will give it the cushion it needs to retrench. But a failed deal also presents existential challenges for the company, which was formed in 1987 through the merger of Baker International and Hughes Tool Co., which was founded by the father of billionaire aviator, inventor and Hollywood tycoon Howard Hughes Jr.

The elder Howard Hughes patented a new drill bit with two rotating cones that could chew through hard rock, allowing drillers to reach oil deeper below the Earth's surface than they ever had before.

Even today, Baker Hughes is considered a leader in developing new technologies for the oil patch. But the company has struggled in its newer ventures into businesses such as fracking, which require mastery of vast supply chains and logistical challenges, analysts at Piper Jaffray Co. said.

And the company's struggles have been compounded by a year in limbo, tethered to Halliburton.

Oilfield services firms, which are hired to drill and frack wells, were among the first to feel the pain from lower oil prices, and have been forced to make some of the deepest cuts. Most are losing money in big markets such as North America.

But Baker Hughes has been constrained by its merger agreement from making sweeping changes without Halliburton's approval. The company said this week that it carried $110 million of costs during the first quarter that it wasn't able to cut because of the merger, contributing to its $981 million loss.

With the merger scuttled, "the company can begin restructuring and stripping these excess costs from the system," Raymond James analysts wrote last week, anticipating that the deal would be called off.

For the rank-and-file at Baker Hughes, the slow-moving merger compounded the uncertainty created by plummeting oil prices, and many of those who could find other jobs have left, according to analyst reports and interviews with former employees.

Still, many analysts believe that all the hand-wringing about Baker Hughes's fate is overblown: Standing on its own, the company could shake off the malaise that has plagued it in the last year. Unlike many of its peers, Baker Hughes will have a $5 billion cash war chest to spend if oil prices recover and activity ramps up, so it could rebuild and could come out swinging.

"Independently, Baker would quickly become a turnaround story," Evercore ISI analyst James West recently wrote.

Baker Hughes may get a push from the outside. ValueAct Capital Management, an activist hedge fund, bought Baker Hughes shares shortly after the merger was announced. In April, the fund disclosed that it increased its stake and is now Baker Hughes's largest shareholder, with 9% of its shares.

ValueAct has previously pushed for Baker Hughes to consider breaking itself up and seeking other buyers if the merger falls apart, according to a lawsuit brought by the Justice Department over how ValueAct disclosed its initial stake in the company. And the fund has already signaled that it won't sit by quietly as Baker Hughes gets its house in order. In a recent securities filing, ValueAct indicated that it may seek a seat on the company's board.

Write to Alison Sider at alison.sider@wsj.com

(END) Dow Jones Newswires

May 01, 2016 18:17 ET (22:17 GMT)

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