Baker Hughes (BHI)/Halliburton (HAL) Deal Less Likely to Close - Jefferies

Jefferies analyst, Brad Handler, thinks the probability of closing the Baker Hughes (NYSE: BHI)/Halliburton (NYSE: HAL) merger is lower now that the timing agreement with the DoJ has not been extended and with the incremental understanding that the DoJ deems insufficient HAL's offer to divest more than the "Tranche 1 & 2" assets. Both stocks are likely to be punished with BHI the most at risk.

The fact that no agreement has been reached between HAL and the regulator to extend the DOJ's review period is disconcerting: it suggests to us that the DOJ may have concluded that the deal, as proposals currently stand (and such proposals include additional divestitures beyond the publicly disclosed second tranche of divestitures announced on September 28th), will not be approved.

The regulators are wrestling with defining market concentration based purely on products versus based on an integrating capability at the high end of the market. A product-driven market definition can be remedied with more divestitures and HAL can weigh the economic value of selling more businesses. A so-called "integrating" market definition could defy remedies (other than "creating" a third viable competitor), leaving HAL an option to try to seek a more favorable market definition in the courts.

HAL indicated recently it has received regulatory approval from seven countries. We are aware that the Australian Competition & Consumer Commission's (ACCC) has indefinitely postponed announcing a decision as we believe it was waiting to see what the DOJ and/or EU conclude. The EU is in the midst of its Phase I investigation, which concludes by January 12, 2016, but it is likely, in our view, that the EU elects to give itself more time with a Phase II investigation (another 90 working days). We could potentially hear more following a so-called European Commission "state of play" meeting, which we believe takes place some time over the next week. Finally, the Brazilian regulator, known as CADE is in the midst of its evaluation and its current deadline, we believe, is March 18, 2016.

No change to the Buy ratings on either company.

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