--This article was written by Scott Stuart of The Deal.
The Department of Justice moved to block the $26 billion merger of Baker Hughes (BHI) with Halliburton (HAL), of Houston, alleging that the transaction threatens to eliminate competition, raise prices and reduce innovation in the oilfield services industry.
The DOJ opposes the combination because it would combine two of the three largest oilfield services companies in a global market and eliminate competition in markets for 23 products or services used for on-and off-shore oil exploration and production in the U.S.
The competition review of the merger had been extended in the European Union, possibly until June.
"This transaction is unprecedented in the breadth and scope of competitive overlaps and antitrust issues it presents," said Assistant Attorney General Bill Baer of the Department's Antitrust Division. "Halliburton and Baker Hughes are two of the three largest integrated oilfield service companies across the globe, and they compete to invent and sell products and services that are critical to energy exploration and production. We need to maintain meaningful competition in this important sector of our economy."
Halliburton had made several divestitures offers to appease regulators. In December the buyer eliminated a timing agreement between the companies and the DOJ over resolving antitrust concerns and allowing the merger to proceed. At that time the DOJ said the offerings of Halliburton were not sufficient to resolve its concerns and Halliburton made additional concessions.
"During the department's investigation, Halliburton proposed to remedy the significant harmful effects of the transaction by divesting a mix of assets extracted from certain business lines of the two companies," the DOJ said Wednesday. According to the complaint, "the proposed divestitures would not include full business units but rather would be limited to certain assets, with the merged firm holding onto important facilities, employees, contracts, intellectual property, and research and development resources that would put the buyer of those assets at a competitive disadvantage."
Under the merger agreement, Halliburton is obligated to pay Baker Hughes a $3.5 billion termination fee if the deal fails to gain antitrust approval. The agreement also required Halliburton to divest up to $7.5 billion in revenues to satisfy regulators.
Halliburton and Baker Hughes said they intend to contest the DOJ effort to block the merger.
"The companies 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 companies said in a statement. "The proposed merger of Halliburton and Baker Hughes is pro-competitive and will allow the companies' customers to benefit from a more flexible, innovative, and efficient oilfield services company. The transaction will provide customers with access to high quality and more efficient products and services, and an opportunity to reduce their cost per barrel of oil equivalent."
The merger has an April 30 termination date that Baker Hughes could refuse to extend and take the $3.5 billion fee.
Baker Hughes shares traded Wednesday for $41, up 5% on the challenge. On a stand-alone basis Baker Hughes is expected to trade in a range of $30 to $33.
-- This article was originally published by The Deal, a sister publication of TheStreet that offers sophisticated insight and analysis on all types of deals, from inception to integration. Click here for a free trial.