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Will The EU's Smoking Gun Kill The Halliburton-Baker Hughes Merger?

The EU is reportedly "asking a lot of questions" about the Halliburton/Baker Hughes merger.

Jefferies believes this indicates the EU has concerns that the deal could reduce competition in oilfield services. I agree with Jefferies.

Market chatter suggests Halliburton is offering prices concessions that lesser capitalized competitors may find hard to match -- "The TWA Treatment".

Web traffic data illustrates that the EU is aware of the "TWA Treatment," which could potentially be viewed as anti-competitive.

The TWA Treatment could be the EU's smoking gun to kill the merger. Avoid HAL and BHI.

Halliburton employees. Source:

The merger between Halliburton (NYSE:HAL) and Baker Hughes (NYSE:BHI) has come under scrutiny over the past few weeks. Late last month the Australia Competition And Consumer Commission ("ACCC") questioned whether the merger of the numbers two and three oilfield services players would facilitate coordinated behavior post-transaction. Last week Jefferies expressed less confidence in a successful closing for the merger after EU regulators began to "ask a lot of questions":

EU regulators are beginning to "ask a lot of questions" about the proposed deal, which could indicate concerns that the deal would reduce competition at the upper end of the energy services market.

I have warned investors about the risk of the merger not closing. The market appears to have come to that realization. At $48 BHI trades at a 21% discount to its implied merger value (1.12x HAL shares for each BHI share, plus $19) of $61 per share. Historically, BHI has traded at a discount of 8%-10% to its implied merger price; the widening spread to BHI's merger price could indicate that investors are also becoming skeptical of a successful deal.

When two large companies merge a big fear for regulators is that the merged entity [i] will have outsized power post-transaction and [ii] it will potentially use that power to reduce competition. This may not be good for clients. Halliburton has been punishing competitors in the oil patch, particularly in North America. My previous article informed investors of market chatter from Blueshift Research on how Halliburton was giving Weatherford (NYSE:WFT), amongst others, the TWA treatment:

Three well completion managers working for E&P companies with operations in the Rocky Mountain area agreed that Halliburton has become the leader in giving price concessions for...