Why Deutsche Bank Is No Longer Buying Baker Hughes

A number of media reports mentioned that the DoJ plans to sue to block the proposed merger of Baker Hughes Incorporated (NYSE: BHI) with Halliburton Company (NYSE: HAL). The companies may opt for litigation to proceed with the transaction.

Baker Hughes Downgraded

Deutsche Bank’s Mike Urban downgraded the rating on the company from Buy to Hold, while slashing the price target from $43 to $78. The analyst said that while the merger with Halliburton has strong merits, there is now significant uncertainty around the closing of the deal.

“Against that backdrop, we see risk reward between a successful transaction and a deal-break as roughly balanced and we would expect the shares to be relatively range bound during the litigation process should the transaction proceed down that path,” Urban wrote.

Both rig count and pricing have declined more than expected so far in the year. This is especially the case in North America. Urban added, “BHI may also face some transitional challenges on a stand-alone basis should the deal break, partially offset by further cost cutting opportunities.”

The EPS estimates for 2016 and 2017 have been reduced from ($0.37) to ($0.42) and from $1.60 to $1.20, respectively.

Halliburton

The analyst maintained a Buy rating for the company, while reducing the price target from $53 to $40. He commented that although the deal with Baker Hughes has merits, Halliburton is likely to be “on extremely strong footing,” even if the deal does not go through.

“If anything, the lack of distractions after well over a year of merger related activities as well as investors currently on the sidelines coming in could actually benefit the stock in the short-term,” Urban stated. He added that Halliburton is poised to benefit from the imminent cyclical recovery in production oriented spend.

The EPS estimate for 2016 has been raised from $0.71 to $0.97, to reflect the absence of the initial dilution from the deal with Baker Hughes. The EPS estimate for 2017 has been reduced from $2.80 to $2.40, removing accretion from the deal.