As the deal with Halliburton (NYSE:HAL) continues to drag on, Baker Hughes (NYSE:BHI) actually turns into an interesting play. The ongoing EU delay makes preparing for a potential termination of the deal a wise move.
After the original offer back at the end of 2014, Baker Hughes wasn't interesting do to the premium price paid for the oilfield services stock as the industry collapsed. Now that the stock is trading down to new lows, an investment might offer the best way to benefit from whatever happens with the deal.
Time To Alter Thesis?
The original thesis last revisited in December was to own Halliburton to play the benefits of the merger with Baker Hughes. The big rally in Baker Hughes due to the premium of the deal helped prop up the stock during the time the sector plunged during 2015.
The fear was that owning Baker Hughes set up investors for a big loss if the deal fell apart. The premium is starting to seep out of the stock as the regulators in the EU and DOJ continue to ask for more information and delay the approval of the merger. For now, Baker Hughes has still outperformed even Schlumberger (NYSE:SLB) since the start of November 2014.
With Baker Hughes losing some of the merger premium, the stock offers a significant discount to the offering price. To recap, Halliburton offered 1.12 shares and $19.00 in cash per each Baker Hughes share. At the current $36.39 price for Halliburton, Baker Hughes' shareholders will get $59.75 per share if the deal closes. The roughly 20% discount offers around a 27% immediate upside to shareholders.
The main reason that playing the merger via Baker Hughes is now the reduced risk play is that the company has a benefit with the termination of the merger. Based on the original agreement, Halliburton has to pay Baker Hughes a lofty $3.5 billion termination fee.
The amount probably wasn't nearly as beneficial when the deal was announced. At this point though, Baker Hughes is only worth $20 billion. The fee amounts to 17.5% of the current market cap. The company already has a fantastic balance sheet with cash of $2.3 billion and debt of around $4.0 billion. A cash position of $5.8 billion would place the company in a position for meaningful buybacks or the ability to scoop up some distressed assets on the cheap.
The deal is reminiscent of the failed merger between AT&T (NYSE:T) and T-Mobile (NASDAQ:TMUS) at the end of 2011. AT&T paid merger termination consideration valued at $4.0 billion that included $3.0 billion cash and valuable wireless spectrum. Since that time period, T-Mobile was by far the better investment though one can probably argue whether the termination fee was the reason for that out performance.
The Halliburton merger with Baker Hughes remains an intriguing investment opportunity with the valuation prospects and merger synergies. The difficulty with obtaining regulatory approval and the merger termination fee combined with the shifting stock prices, Baker Hughes is quickly becoming the more interesting way to play the deal.
The recommendation is to buy Baker Hughes if the spread continues to rise.
Disclosure: I am/we are long HAL.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
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