Monday, August 31, 2009

Baker Hughes to acquire BJ Sevices, Street unimpressed (BHI, BJS)

AlphaNinja - This morning, oilfield services company Baker Hughes(BHI) announced a $5.5billion merger with BJ Services (BJS). Baker Hughes shares are down 7.5%, so due to the stock-based nature of the deal it is already less valuable than the announced price. BHI shares are likely down due to the rich price paid.

Details of the deal, which Baker Hughes expects to be accretive to earnings by 2011:

The agreement represents a premium to BJ Services stockholders of 16.3% over the closing price of BJ Services stock on August 28, 2009. Under the agreement, BJ Services stockholders will receive 0.40035 shares of Baker Hughes and cash of $2.69 in exchange for each share of BJ Services common stock. Upon closing, and reflecting the issuance of new Baker Hughes shares, BJ Services stockholders collectively will own approximately 27.5% of Baker Hughes' outstanding shares.

"Our two companies have highly complementary products and services with very little overlap. Baker Hughes has a long record of partnering with BJ Services on major projects. The proposed merger will make Baker Hughes a stronger, more efficient service provider for our customers worldwide, by integrating pressure pumping with Baker Hughes' wide range of products and services."

Baker Hughes expects to realize annual cost savings of approximately $75 million in 2010 and $150 million in 2011 as it eliminates redundant costs, consolidates facilities, and further rationalizes field costs. Baker Hughes expects the combination to be accretive to earnings per share in 2011."

From a Free Cash Flow perspective, the deal looks pretty rich. This year's net income is estimated at about $200million and 2010's at $150million, both down significantly from the 2006-2008 timeframe. Factoring in continued high capital expenditures and there simply is not free cash flow generation. Baker Hughes is likely assuming at least partial reversion to previous years profit levels, and will probably cut Capex and operating costs in a bid to make this deal a winner.

Previous years' selected financial data for BJ Services:

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