April 6, 2016 11:30 AM, EDT

Justice Department Sues to Block Halliburton-Baker Hughes Merger

Jamie Schwaberow/Bloomberg News

Halliburton Co. was sued by U.S. antitrust officials who say its planned takeover of rival oil-services firm Baker Hughes Inc. threatens competition and should be blocked, a blow to Halliburton’s bid to bulk up to better compete against rival Schlumberger Ltd.

The deal, which would unite the No. 2 and No. 3 firms in the industry, has been bogged down in regulatory reviews around the globe since it was announced in 2014 because of antitrust authorities’ concern over preserving competition. It threatens to eliminate head-to-head competition in 23 products and services used in oil exploration, the Justice Department said in a statement April 6.

Halliburton ranks No. 5 and Baker Hughes is No. 16 on the Transport Topics Top 100 list of the largest private carriers in North America.

“The proposed deal between Halliburton and Baker Hughes would eliminate vital competition, skew energy markets and harm American consumers,” Attorney General Loretta Lynch said. “Our action makes clear that the Justice Department is committed to vigorously enforcing our antitrust laws.”

The lawsuit extends the Justice Department’s aggressive record under Bill Baer, its antitrust division chief, in challenging mergers combining big players in industries as varied as beer, air travel and mobile-phone service, said Allen Grunes, an antitrust lawyer at Konkurrenz Group in Washington.

"More and more deals are in the antitrust no-fly zone for the Justice Department, and they’re shooting them down," he said.

Halliburton announced the $35 billion cash-and-stock deal to buy Baker Hughes in November 2014 to become a stronger No. 2 against industry leader Schlumberger by achieving scale and building a better technology portfolio in a market where the ability to innovate is increasingly critical for success. Companies such as Halliburton and Baker Hughes help energy explorers do everything from fracking oil fields to lining wells with cement to reviving output from aging reservoirs.

The two rivals said they planned to fight the lawsuit.

"The companies believe that the DOJ has reached the wrong conclusion in its assessment of the transaction and that its action is counterproductive, especially in the context of the challenges the U.S. and global energy industry are currently experiencing," they said.

The transaction was scheduled to close last year but has been delayed as the companies grapple with antitrust concerns raised by competition authorities. Halliburton is on the hook to pay Baker Hughes $3.5 billion if the deal collapses.

At the time the deal was struck, Halliburton said it was willing to divest assets that generate as much as $7.5 billion in annual revenue to win antitrust approval.

To appease regulators, Halliburton agreed to sell several businesses. Among them were its drill-bits unit, which makes the tips of drills for digging wells, and the drilling-services arm, which operates as Sperry Drilling and uses data to track and steer the direction of drill bits. It also agreed to sell Baker’s so-called core completions business, which provides equipment for controlling the flow of oil as it is readied for production.

That wasn’t enough for the Justice Department.

“This transaction is unprecedented in the breadth and scope of competitive overlaps and antitrust issues it presents,” the antitrust division’s Baer said.

Halliburton still may be able to salvage the deal by reaching a settlement with the Justice Department that calls for additional asset sales. In the U.S. case against the merger of American Airlines and US Airways in 2013, the carriers resolved the government’s concerns by agreeing to sell airport assets to low-fare competitors.

The proposed Halliburton-Baker Hughes merger also has faced hurdles in Europe, where the European Commission stopped the clock on its review of the deal for the third time, saying crucial details were missing.

Total SA CEO Patrick Pouyanne said last month in an interview that the proposed merger wasn’t good news for explorers and producers.

Other oil companies have complained to regulators. Chevron Brazil said the acquisition could reduce to two from three the number of large service providers for certain products for drilling and completing wells, such as completion tools and cementing services. Depending on the results of asset sales, the merger could raise prices for these services in Brazil, according to filings posted last year with Cade, the Brazilian antitrust regulator.