Baker Hughes Plus BJ Services: Doing Some Simple Math

Mr. Market was not impressed by Baker Hughes' (BHI) acquisition of BJ Services (BJS). BHI was down 10% on the day of the announcement, closing at 34.45. BJS was up only slightly, closing at 16.06. Commentators noted that the combination was a good strategic fit, giving BHI a position in pressure pumping similar to that enjoyed by Schlumberger (SLB) and Halliburton (HAL), at the same time compensating for BJS' lack of a strong international presence. Based on the strategic fit, the combination is worth more than the two companies separately.

A three or four way comparison is necessarily complex, but a simple analysis in terms of 5 year average EPS suggests that Mr. Market is getting it wrong:



I did some math on the merger, finding that it is fair to BJS shareholders in that the value received in BHI shares is equal to the value of the BJS shares to be relinquished, using the 5 year earning histories for comparison. Computing a five year average EPS for the combined entity, I arrived at a figure of 4.42.

BHI has said the expense savings in 2011 will be 150 million, or .35 per share after allowing for the shares to be issued in connection with the acquisition. So a proforma 5 yr average EPS, including the projected expense reduction, would be 4.77.

If the global economy and with it the Energy Sector are in recovery by 2011, as seems increasingly likely, then earnings should tend back toward the long term averages. Applying a multiple of 12 to the 4.77 proforma for BHI+BJS, the shares would be worth 57, 65% above yesterday's close.

Disclosure: Long BJS

Comments

[Respirate:]

Tom, I kind of expected that you'd have an article on this acquisition. Thanks for the timely and well written opinion!

I agree with you that the deal is a good fit for both companies. When the market threw a minor tantrum when the deal was announced, it provided a better opportunity (by nearly 10%) to those of us with cash in hand.

I've been holding onto the opposite end of the deal, namely BHI. Hopefully the addition of BJ Services will integrate some significant earnings potential before the next spike in oil.

For another SA take on the BHI-BJS deal:
seekingalpha.com/artic...

Thanks again.

Sep 01 06:28 PM

[BullnBear:]

The deal is a great fit for both companies; the timing of the deal with the general choppy factor playing out in the overall market is probably adding more angst than what is or should be justifiable.

Sep 01 11:40 PM

[Perry B:]

Good article this merger was a nice fit. They should do well. Thanks for doing the math

Sep 02 09:51 AM

[jtevans:]

I have also have been waiting for this for some time. I am long on both BHI & BJS. Pressure pumping (fracking) is essential for shale gas and will be needed for enhanced geothermal power.

Sep 02 11:36 PM

[Wisdom vs. ...:]

bjs is losing pumping jobs b/c not integrated, bhi has no pumping, the logic of this transaction is, as we say in the oilfield, "no shit!" my math says this conglomerate would have had over $4.4 OCF, $44, and 2.68 EPS, $42.88 at 16PEx (vs ~$25 current if the shares are simply traded). those numbers are TTM, which has been below average, plenty of upside even with $43. there is no k in fracturing, folks, we just write fracing; add another c if you must (unless there is some latin element i do not remember from high school)

Sep 05 10:10 PM

[Jim Beaumont:]

The trick now is for BHI and BJ to intergrate the groups without losing employee motivation or simply not losing their best employees. Name changing, process changes, benefits restructuring, integrating departments and systems e.g e mail addresses slows down the organizations expected joint progress. Both integrated organizations such as Halliburton and Schlumberger are still suffering the effects 10 years on. The good news is that BHI & BJ are intgrating during a downturn which helps a lot.

Sep 16 09:07 AM

[uamt1998:]

Can someone tell me if shareholders on and after the 28th Aug are treated the same i.e will investors who bought BJ shares after the 28th August get the $2.69 premium if they hold on to their shares till the deal closes at the end of the year?

Oct 28 09:35 AM