TheChek News Flow

--> look slike ZC is teh problem

* Current package addresses 2/3 DoJ concerns

* Tough case for litigation absent real divest buyer

The Department of Justice (DoJ) is likely to be skeptical that a private equity firm like the Carlyle Group will be able to create a strong oilfield services business capable of replacing competition lost from the Baker Hughes (NYSE:BHI) and Halliburton (NYSE:HAL) merger, three industry sources said. Some of these industry sources and antitrust attorneys added that the companies do not appear to have proposed a viable divestiture package since no complete businesses appear to be on the table.

The two oilfield services companies have been working for months to line up a buyer for assets they intend to divest to resolve antitrust concerns about their proposed USD 35bn merger. Along with lead bidder General Electric (NYSE:GE), the Wall Street Journal has reported that Carlyle is in talks to buy the assets for over USD 7bn.

The report came days after the DoJ filed suit in Delaware to block the merger, alleging the transaction threatens to eliminate competition, raise prices and reduce innovation in the oilfield services industry. Halliburton and Baker Hughes said in response that they plan to contest the merger but have not agreed to extend their merger agreement past 30 April. After that date, either company can terminate the agreement or both groups could continue to secure regulatory approval in the US and Europe.

This news service has reported that in addition to GE, other buyers have been pursing the divestiture. Carlyle was among a group of large financial sponsors reported by this news service last summer to be examining the assets. GE has been widely considered the only buyer capable of resolving antitrust regulators’ concerns about the transaction and has been trying to drive a hard bargain, this news service previously reported.

The three industry sources said the idea that a private equity buyer like Carlyle, which also owns oilfield services businesses, could be a strong third competitor instead of a strategic like GE, which has a massive oil and gas business, is unlikely to find support from the DoJ. These industry sources described the news leak to be a way to force GE’s hand to cough up more in valuation for the divestitures.

Two of the industry sources said it would be hard for Carlyle to raise debt financing for the transaction amid non-robust financing markets and ongoing concerns about the health of the oil and gas industry. Carlyle could perhaps partially fund the purchase by offering shares of the new entity to existing Halliburton shareholders as an alternative to debt financing, one of the industry sources said.

Halliburton declined to comment. Carlyle did not return a call for comment.

The DoJ does not like ongoing entanglements between merging companies and the buyer of their divestiture, two antitrust attorneys said. The DoJ has routinely said in the past that it does not want seller-financing for divestitures, the first antitrust attorney said.

The DoJ lawsuit says the Halliburton merger will combine two of the three largest oilfield services companies in the US and the world, eliminating important head-to-head competition in markets for 23 products or services used for on- and off-shore oil exploration and production in the US.

Strategic buyers are the DoJ’s “gold standard” for divestiture buyers, the first antitrust attorney said. Therefore, the DoJ will want to look “harder, longer and closer at a private equity buyer before signing off,” this attorney said.

While there is no "absolute rule" against a private equity buyer, a lot would depend on the financial sponsor's experience in the industry and the management team it would put together to handle the divested assets, this attorney said.

The second attorney agreed that a private equity buyer would not sit well with the DoJ. But the completeness of the divestiture package, and how well it addresses the DoJ’s concerns, remains the real hurdle, this attorney said. The companies cannot simply sell off products across the 23 markets where the DoJ found antitrust issues, this attorney said. The DoJ will want the companies to sell entire businesses regardless of the buyer, this attorney said.

DoJ antitrust chief Bill Baer has characterized the deal as unfixable. The merging parties have said that they will contest the government’s challenge to the combination, including the DoJ’s allegations that the remedy proposals are insufficient.

Therefore, Baker Hughes and Halliburton will likely have to litigate the fix in trial with the DoJ, in which case the government will attack the viability of the divestiture buyer and the package itself, according to the two antitrust attorneys and a third antitrust attorney.

Litigating the fix would allow the merging parties to defend the deal in the context of the completed divestiture. The success of litigating the fix depends in part on the strength of the remedy package and the buyer of the divested assets. In its complaint against the merger, the DoJ targeted both the viability of the parties’ proposed divestitures and the alleged absence of a strong buyer.

At the same time, the government has not revealed its preferences for the buyer of divested assets, people familiar with the matter said prior to the filing of the DoJ's suit. The divestiture package is broad and has expanded over time, they said.

The proposed divestiture would fail to transfer intact businesses to the buyer, the DoJ wrote in its complaint. Regulators alleged that because the parties would not be transferring any “complete businesses” to the divestiture buyer, Halliburton and the buyer would need to enter into “numerous support agreements that would leave the buyer dependent on one of its biggest competitors to operate successfully.”

The DoJ’s rationale against the proposed remedy package appears solid, the second antitrust attorney said. At the same time, this does not mean another, more substantial remedy package wouldn’t address the government’s concerns, that attorney said. Still, as of now, the parties do not have a definitive buyer in place for a sufficient remedy package, which they would need to successfully litigate the fix, he said.

Two of the industry sources said that Halliburton and Baker Hughes’ current remedy package addresses around two-thirds of the problematic areas identified by the DoJ, but without completely divesting the technology and manpower needed to run these businesses, it is not a viable remedy package.

According to the DoJ complaint, the proposed divestitures would not include full business units but would rather be limited to certain assets, with the merged firm holding onto important facilities, employees, contracts, intellectual property, and R&D resources that would put the buyer of those assets at a competitive disadvantage.

Because there are so many markets, the companies cannot go into court and argue that the DoJ’s relevant market definition is flawed, which is what the defense in the hotly contested merger of Staples (NASDAQ:SPLS) and Office Depot (NASDQ:ODP) has argued against the Federal Trade Commission (FTC), the second attorney said.

Even if the companies were to argue that only a selection of the markets highlighted by the DoJ are relevant, they would still need adequate divestitures to resolve the competitive issues in those markets, this attorney said.

The fact that the DoJ identified and defined so many markets indicates that a satisfactory settlement may be very difficult to broker, the first antitrust attorney said.

The case is far more complex than a grocery store merger, where there’s one product or service market and certain locations get sold off due to geographic overlaps, the third antitrust attorney said. “You’re not talking about something that’s easily understandable,” this attorney said.

The people familiar with the matter agreed that the deal is detail-intensive due to its global nature, and that the deal is, therefore, much more complex than many mergers.

Settlements are always possible, the third attorney said, adding that regulators prefer upfront buyers for divested assets. In a litigate-the-fix situation, the judge would likely not be able to decide whether the remedy sufficiently restores competition if there is no buyer in place, this attorney said.

*ROGERS, DONFELD SAID TO DISAGREE W/ CIO BURDICK ON MKT OUTLOOK