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From "Les Échos" 17/11/2014

Halliburton’s USD 34,6 billion purchase of Baker Hughes. The competition authorities may qualify this operation as monopolistic.

In oil industry, major transactions are back on the forefront, as the sector is directly affecting by Brent falling price. Yesterday, Halliburton, the world number two, concluded the acquisition of Baker Hughes, the world number three, for about USD 35 billon.

The new group thus records a yearly turnover of USD 52 billion, far beyond Schlumberger in terms of revenues (USD 45 billion). Nevertheless, Schlumberger is the first one, in terms of market capitalisation, recording USD 120 billion.

This alliance would generate some USD 2 billion economies

This operation presents many advantages: first, the transaction will enable a drastic cost reduction, as the sector is highly capitalistic. Baker Hughes works in 80 countries and is famous for its drilling platforms float. Its activities are similar to those of Halliburton in many fields, so some economies amounting to USD 2 billion are expected, according to both groups.

In the oil services sector, perspectives are becoming harder making this rationalisation unavoidable: Brent price have dropped dramatically since 2010, thus compelling oil groups to reduce their exploration programmes, then entailing negative consequences for sub-contractors such as Baker Hughes and Halliburton.

Confronting a legion of Asian companies

Moreover, the new group will be able to face a legion of Asian companies, competing now in the sector of hydraulic fracking. Nearly 25 companies are competing to operate the American shale gas and oil. The main “three” major actors (namely Schlumberger, Halliburton and Baker Hughes) experienced a drop from 75% to 45% of their market share, within a decade. According to Morgan Stanley, the joint-venture between numbers 2 and three would “give them space to rise their prices and increase their margins”. According to Société Générale experts, “the sector is ripe for a consolidation phase”.

During a long time, Baker Hughes has been reluctant to join Halliburton. Stricken by Brent falling price, the group thus recorded a 32% decrease of its market price since its July highest valuation. Last week, negotiations were becoming a drama when Halliburton threatened to clear out the whole Baker Hughes administrative board, which was blocking the transaction endlessly. After a month of arm-wrestle negotiations, both parties have finally decided to draw a cordial agreement.

Activity transfer in the fields of pumps and compressors

This project is highly recommended to face competition authorities (in America, China, Europe and so on), assertively decided to block any transaction, which may entail possible dominant position abuses. In fact, that’s a world duopoly which is more feared rather than a monopoly: according to RBC Capital Markets experts, Halliburton and Schlumberger would absorb some 70% to 90% of the world activities linked to oil well drilling.

In order to coax the authorities, Halliburton committed to sell assets generating USD 7,5 billion of yearly revenues. “We consider that some activities like pumps and compressors will be particularly scrutinised by the American Justice Minister”, said Bank of America. Halliburton committed to compensate Baker Hughes with USD 3,5 billion would the transaction fail following regulatory decisions, meaning that Halliburton is quite confident about the conclusion of the transaction. 

Courtesy of Les Échos "Industrie et Services" 17/11

Courtesy of http://schema-root.org/commerce/corporations/petroleum/halliburton/halliburton.03

Courtesy of http://media.glassdoor.com/m/72/baker-hughes-office

Courtesy of http://www.oginfo.com/images/US_wellcountMapBakerHughes.jpg