HAL Halliburton Co

By Brent Kendall and Alison Sider 

WASHINGTON -- The Justice Department on Wednesday filed an antitrust lawsuit challenging Halliburton Co.'s planned acquisition of rival Baker Hughes Inc., alleging that the deal would threaten higher prices and reduce innovation in the oil-field services industry.

The lawsuit, filed in a Delaware federal court, asserts that the transaction would eliminate important head-to-head competition in markets for 23 products and services used for U.S. oil exploration and production, from drill bits to offshore cementing services. The effect would be to skew energy markets and harm American consumers, the department said.

Bill Baer, the Justice Department's antitrust chief, pulled no punches in his criticisms of the merger and made clear the government's decision to sue wasn't a close call.

"I have seen a lot of problematic mergers in my time. But I have never seen one that poses so many antitrust problems in so many markets," Mr. Baer said. Some deal proposals should never leave the corporate boardroom, he said, and "this deal falls squarely in that category."

The companies pledged to fight the Justice Department lawsuit. In a joint statement, they said they "believe that the DOJ has reached the wrong conclusion in its assessment of the transaction and that its action is counterproductive, especially in the context of the challenges the U.S. and global energy industry are currently experiencing."

The Wall Street Journal reported Tuesday that a government lawsuit challenging the transaction was imminent.

The nearly $35 billion deal, originally announced in November 2014, proposed to combine the world's second- and third-largest oil-field services firms, behind only Schlumberger Ltd.

The transaction has faced antitrust resistance around the globe, including in Europe. The U.S. lawsuit Wednesday is the biggest hurdle yet for the merger.

Since the deal was struck, the oil-field services industry has faced severe setbacks, as persistently low oil prices have slashed demand for the business of drilling wells and pumping oil and natural gas.

Mr. Baer said the government was "certainly aware" of what has happened to oil prices. But he said the companies operate in a cyclical business and the downturn "is not a justification for an anticompetitive merger."

Halliburton and Baker Hughes have been trying to ease concerns that their merger would slash competition by offering to sell off assets worth billions of dollars to other firms, an action called divestiture.

The companies said Wednesday their proposal would "facilitate the entry of new competition in markets in which products and services are being divested." Halliburton said it strongly believed "that the proposed divestiture package, which was significantly enhanced in response to concerns that the DOJ expressed during the course of its 15-month investigation, is more than sufficient to address the DOJ's specific competitive concerns."

The companies said their combination would create a more flexible, innovative and efficient company that could reduce costs for customers.

Baker Hughes Chief Executive Martin Craighead told employees in a letter the company believed it had a strong case. Mr. Craighead said he couldn't predict how long the litigation would take.

The companies previously set a deadline of April 30 for obtaining all the regulatory approvals for the merger agreement, after which either company could terminate the deal, though they could also choose to stay the course.

The Justice Department was highly critical of the companies' divestiture proposal, saying the merged firm would retain more valuable assets while selling less-significant ones to third parties.

The department's Mr. Baer said the government had held off on filing a lawsuit to give a full hearing to the companies' offer. But he said Halliburton's proposal for fixing the transaction's competitive problems "changes by the day" and is "so complicated and convoluted" that it could never work to preserve a competitive marketplace.

Baker Hughes stands to collect a steep $3.5 billion breakup fee from Halliburton if the deal doesn't pass antitrust muster. But some analysts said Baker Hughes might struggle to regain its footing as an independent company if the deal falls through.

"We believe the biggest risk with a suddenly stand-alone BHI is the state of the company's operational capabilities after a wave of departures and, according to multiple industry sources, the apparent unorganized and disengaged nature of the rest of the organization," Wells Fargo analysts wrote.

But, they noted, the company would have as much as $5 billion on its balance sheet and a lot more freedom to cut costs and improve margins than it has had in the past year. Baker Hughes shares shot up almost 9% to $42.83 Wednesday. Halliburton shares rose almost 6% to $36.44.

In addition to the breakup fee it would owe Baker Hughes, Halliburton would be on the hook to redeem $2.5 billion worth of bonds if the merger isn't consummated by November. Still, analysts said the company could likely handle the cash outflow.

"With Halliburton, the balance sheet becomes a little less flexible, but it doesn't fundamentally redefine the company," said Bill Herbert, an analyst at Simmons & Co., a division of Piper Jaffray Cos.

While most mergers continue to receive government approval, the legal challenge is the latest evidence that U.S. antitrust enforcers in the Obama administration are pushing back against transactions they believe raise significant threats to competition.

Last year, the Justice Department challenged several major deals, including General Electric Co.'s planned sale of its appliance business to Electrolux AB and Comcast Corp.'s planned acquisition of Time Warner Cable Inc.

Both of those deals were eventually abandoned.

The Federal Trade Commission, meanwhile, is in the midst of court proceedings against a proposed merger of Staples Inc. and Office Depot Inc.

Write to Brent Kendall at brent.kendall@wsj.com and Alison Sider at alison.sider@wsj.com

(END) Dow Jones Newswires

April 07, 2016 02:16 ET (06:16 GMT)

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