The US government wants to stop 2 of the largest oil services companies from merging

Thomson Reuters

(Reuters) - The U.S. Justice Department will file a lawsuit as soon as this week to stop oilfield services provider Halliburton from acquiring smaller rival Baker Hughes, a source familiar with the matter said on Tuesday.

Since the deal to combine the No. 2 and No. 3 oil services companies was first announced in November 2014, oil prices have fallen by more than 55 percent. 

The combined company would overtake Schlumberger NV as the world's largest oilfield services provider, fuelling concern about higher prices for customers.

Faced with opposition from antitrust regulators at the Justice Department, the companies may either opt to cancel the planned tie-up or fight the government in court.

Share prices for Baker Hughes closed down 5.1 percent at $39.36 late Tuesday afternoon while Halliburton ended up 1.2 percent at $34.40.

Halliburton and Baker Hughes both declined comment on Tuesday.

The two sides had been discussing asset sales aimed at saving the deal, which was originally valued at $35 billion when it was first announced but is now valued at about $25 billion based on the decline in Halliburton shares. 

In January, Halliburton told regulators it was prepared to sell assets with combined 2013 revenue of $5.2 billion to win antitrust approval.

If the deal collapses due to antitrust concerns, Halliburton must pay Baker Hughes a $3.5 billion breakup fee, according to regulatory filings.

The proposed deal has also hit headwinds in Europe, where the European Union's competition authority was concerned that the proposed merger would reduce competition and innovation in more than 30 product markets, both offshore and onshore.

Regulators in Australia have also flagged concerns about the massive tie-up.

As far back as July 2015, Reuters reported that a source said there were concerns among U.S. antitrust enforcers that the tie-up would lead to higher prices and less innovation.

The Justice Department's worry at that time focused on two areas, the source said. One was that the drilling technology businesses that were divested would go to small companies that could not effectively compete with the two leaders. The other was that the leaders would have less incentive to innovate.

Much of the oilfield service industry relies on aggressive competition on the technological front, and it appears the Justice Department was concerned the tie-up would cause the newly combined company to cool its laboratory activities. 

Baker Hughes in particular has been extremely aggressive in developing new oilfield technologies, part of its appeal to Halliburton from the beginning. For instance, Baker Hughes developed smartphone apps that help its customers in the field decide in real time how best to hydraulically fracture new wells. 

In any case, uniting Halliburton and Baker Hughes would create a dominant leader in North Dakota with more than half the cementing market and a leading position in fracking.

Lower oil prices had given investors hope that the companies' best path forward was together, especially as demand for their products and services evaporate as customers slashed budgets.

Shareholders of Baker Hughes and Halliburton had voiced support for the merger, essentially a defensive move in response to clients slashing their exploration and production budgets because of tumbling oil prices.

(Additional reporting by Amrutha Gayathri; Editing by Diane Craft)

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