Do Baker Hughes Shareholders Win No Matter What Happens to the Proposed Halliburton Transaction?

By Christopher MalcolmMergers and

Source: Halliburton website.

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It's currently unclear if Halliburton's (NYSE: HAL) proposed takeover of Baker Hughes (NYSE: BHI) is ever going to close, because of antitrust concerns. My crystal ball can't even make a guess.

Either the merger happens or it doesn't, but under either outcome I think buyers of Baker Hughes shares at current prices might walk away pleased. That makes it hard to lose.

Background -- a megamerger In November 2014, Halliburton announced that it would acquire rival Baker Hughes, combining the No. 2 and No. 3 oilfield services companies in the world.

Source: Halliburton presentation.

At the time the deal was announced, the total price for Baker Hughes' equity was $34.6 billion, a 54% premium to the share price at that time. For Halliburton, the appeal of the acquisition was a wider range of products and services, a much bigger share of the market, and $2 billion of cost improvements through synergies.

Fast-forward 16 months, and the deal hasn't closed and doesn't seem near completion.

If the deal closes -- a juicy premiumIn the merger, each Baker Hughes shareholder will receive 1.12 Halliburton shares and $19.00 in cash for each share of Baker Hughes. Back in November 2014, when Halliburton was trading at $52.00, Baker Hughes shareholders could expect $78.00. Since then, Halliburton shares have gone down with the rest of the energy sector.

HAL data by YCharts

At Halliburton's recent price of $36.16, a Baker Hughes shareholder could now expect around $60.00 if the deal were to close in the near future.

With Baker Hughes shares recently trading for only $46.65, there's potential for a 29% premium to the current share price should the deal close. That's a big premium and surely reflects the market's concern that the deal will never close. This would be a nice short term perk, but that alone isn't the reason to invest in Baker Hughes. There is also long term value to be had here if the deal doesn't close.

A short term win would be fine, but an investor will be more focused on the long term potential of Baker Hughes both with and without merger.

If the deal doesn't close -- a pristine balance sheetShould the deal not close, Halliburton has to pay Baker Hughes a fee. A really big fee -- $3.5 billion. That's a huge amount of money for Baker Hughes. For perspective, we can turn to recent financial results. From 2012 through 2014, Baker Hughes' cumulative net income was $4.15 billion.

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Source: Baker Hughes 2014 annual report.

This one fee nearly equals three full years of earnings during the boom times of $100 oil prices. That's a big deal.

For the balance sheet, it could be transformative. As of Dec. 31, Baker Hughes had $2.3 billion in cash and $3.9 billion in long-term debt -- or $1.6 billion of net debt. A $3.5 billion cash infusion puts the company into a significant net cash position, even after allowing for some income tax leakage.

Now imagine the possibilities for Baker Hughes of receiving this balance sheet makeover at some point during 2016. The service sector has been under extreme stress and there will be tremendous acquisition opportunities for the rare companies with the financial means to act. I'm not talking about just entire companies, I'm also talking about being able to purchase oilfield equipment at pennies on the dollar. Seizing such opportunities could result in large returns on the money invested if oil prices and activity levels rise in the future.

For investors -- you still must be bullish on oil pricesI think both of the possible results from the antitrust deliberations are friendly to Baker Hughes shareholders who are buying near current prices. A 29% premium is really nice, and a $3.5 billion cash infusion would leave this company in great shape if the deal doesn't happen.

One thing to keep in mind, however, is that if the deal doesn't go through, you're definitely going to be exposed to the current level of activity in the oil and gas business. If the deal does go through you could eliminate that oil exposure by quickly selling the Halliburton shares you have received and pocketing that premium. If the deal goes through and you hold the Baker Hughes shares you will still have that oil exposure. I'm bullish on seeing oil prices rise over the remainder of this year and for drilling levels to follow that rise in 2017 so exposure to oil prices is a plus for me. If you don't share that opinion with me, maybe Baker Hughes isn't for you.

The article Do Baker Hughes Shareholders Win No Matter What Happens to the Proposed Halliburton Transaction? originally appeared on

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