New York (AFP) - US oilfield services giants Halliburton and Baker Hughes were picking up the pieces of their broken merger deal Monday after antitrust regulators' opposition proved too great to overcome.
Halliburton and Baker Hughes announced late Sunday they had called off their $28.6 billion merger that would have combined the world's number two and number three oilfield services company to create a powerful rival to global leader Schlumberger.
The deal was intended to strengthen the competitive position of both companies as the US oil industry grapples with a dive in crude prices that began almost two years ago and has led to production cutbacks, layoffs and bankruptcies.
Under the terms of the deal, initially valued at $34.6 billion when it was announced in November 2014, Halliburton would have swallowed Baker Hughes.
"Challenges in obtaining remaining regulatory approvals and general industry conditions that severely damaged deal economics led to the conclusion that termination is the best course of action," Halliburton's chairman and chief executive, Dave Lesar, said in a statement.
Now that the deal is scuppered, Halliburton must pay Baker Hughes a $3.5 billion breakup fee.
Baker Hughes moved swiftly Monday to lay out its path as a stand-alone company, announcing a series of actions to reduce costs and streamline its business.
It said it would use the $3.5 billion merger breakup fee to buy back $1.5 billion of shares and $1 billion of debt.
Baker Hughes said it was now free to take measures to slash costs that had been retained in compliance with the merger deal. The initial phase of the cost cutting is expected to result in $500 million of annualized savings by the end of 2016, the company said.
"The company will approach these actions thoughtfully, decisively and swiftly to position the company for success and to maximize shareholder value," said Martin Craighead, Baker Hughes chairman and CEO, in a statement.
Shares in Baker Hughes were up 0.3 percent in pre-market trade, while Halliburton gained 1.0 percent.
Evercore ISI analysts said the termination of the deal was expected and favorable for Baker Hughes.
"The company has maintained a pristine balance sheet through the downturn, and the $3.5 billion fee from Halliburton will only improve its cash position," they said in a client note.
"A crucial next step for Baker Hughes will be to put the managerial pieces in place to position the company to capture maximum value in the impending industry upturn."
- US antitrust muscle -
The collapse of the deal came less than a month after the US Justice Department filed suit to block the proposed merger, saying it would eliminate competition, raise prices and reduce innovation in the oil services business.
The Justice Department said the transaction would eliminate head-to-head competition in markets for 23 products or services, creating a virtual duopoly for key oil services such as offshore well completions and onshore and offshore cementing.
It said the merger would remove the incentives for two industry leaders to improve technology and that low oil prices did not justify a bad deal for consumers.
US Attorney General Loretta Lynch welcomed the deal's demise.
"The companies' decision to abandon this transaction -- which would have left many oilfield service markets in the hands of a duopoly -- is a victory for the US economy and for all Americans," Lynch said in a statement.
"This case serves as a stark reminder that no merger is too big or too complex to be challenged."
The Justice Department said that before it filed suit, Halliburton had offered to divest certain assets in an effort to address its concerns, but that the proposal fell short of satisfying competition issues.
Across the Atlantic, the European Commission in January had opened a probe into the proposed merger, citing concern it would increase oil and gas exploration costs resulting in higher energy prices in Europe.
In 2015, Halliburton had revenues of $23.6 billion, while Baker Hughes had revenues of $15.7 billion. Schlumberger's revenues were $35.5 billion.