HAL Halliburton Co

Private-equity firm looks to outflank GE for assets from Halliburton and Baker Hughes

By Dana Mattioli and Ryan Dezember 

Private-equity firm Carlyle Group LP is in serious talks to buy a package of oilfield-services businesses from Halliburton Co. and Baker Hughes Inc. that could be valued at more than $7 billion, as the energy giants seek to overcome a Justice Department challenge to their planned merger.

Talks between Carlyle and the companies are far along, though not yet exclusive, people familiar with the matter said. The talks mark a shift for Halliburton and Baker Hughes, which for months have been focused on reaching a deal to sell the assets to General Electric Co.

GE and the energy companies have had problems agreeing on a price for the assets, some of the people said. GE is still in the mix, they added. Carlyle's specialty, though, is creating stand-alone businesses from castoff units of larger companies.

The need for Baker Hughes and Halliburton to strike a divestiture deal took on increased urgency last week when the Justice Department filed an antitrust lawsuit challenging their $35 billion proposed deal, arguing it would threaten higher prices and reduce innovation in the oilfield-services industry. The two sides agreed to the deal in November 2014.

As always, the talks with Carlyle could fall apart before an agreement is reached, and even if there is one, there is no guarantee the government won't stand in the way.

Last week, Justice Department antitrust chief Bill Baer said, "There's no fix to this transaction." He also said the gap between the two sides was "a chasm" and that settlement talks were never really under way because the government and the companies fundamentally disagreed on the competitive impacts of the merger.

In an attempt to alleviate regulatory concerns, Halliburton and Baker Hughes last year pledged to sell businesses with $5.2 billion in 2013 revenue; more recently, they proposed to sell additional businesses. Included in the divestiture portfolio are businesses that make various types of sophisticated drill bits and others that put the finishing touches on wells that are drilled but not yet producing.

Following the Justice Department filing, the companies said their divestiture plan would "facilitate the entry of new competition in markets in which products and services are being divested." The companies said the government's move to block their merger "is counterproductive, especially in the context of the challenges the U.S. and global energy industry are currently experiencing" and added they "intend to vigorously contest" the lawsuit.

Oilfield-services companies sell supplies and advice to energy producers and provide services such as drilling and hydraulic fracturing, the rock-cracking process that has enabled a boom in U.S. oil and gas production.

Since Halliburton and Baker Hughes agreed to combine, the industry has faced severe setbacks as persistently low crude prices have slashed demand. Many of the mom-and-pop oilfield services businesses that crowd the space have folded as drilling activity slowed in response to low energy prices, while others are offering their services at or below break-even prices.

The Justice Department said in its suit that Halliburton's divestiture plan "appears to be among the most complex and riskiest remedies ever contemplated in an antitrust case," requiring the separation of businesses that share facilities, employees, software, intellectual property and customer contracts.

In the absence of any settlement between the companies and the Justice Department, the outcome will be decided at trial.

Carlyle, based in Washington, D.C., is among the buyout firms with the most experience navigating the capital. The firm got its start in the late 1980s buying businesses shed by the government in a wave of privatizations, setting them up to run as independent concerns, and then selling them -- often at hefty profits.

Over time, Carlyle adapted its experience in carving out defense contractors and other businesses from the federal government to plucking out-of-favor units from large corporations. In recent years, the firm has invested in deals to acquire units of United Technologies Corp., Illinois Tool Works Inc., Johnson & Johnson and DuPont Co.

Carlyle's $4.9 billion acquisition in 2013 of DuPont's paint-making unit, now known as Axalta Coating Systems Ltd., has been one of the most lucrative investments in the firm's history.

The carve-out approach has helped Carlyle invest large sums from its private-equity business at a time when takeovers of entire companies have become less common amid high company valuations and the mixed performance of the last wave of big buyouts.

An acquisition of Halliburton and Baker Hughes' businesses also would coincide with Carlyle's increased presence in energy. The firm in 2012 acquired a controlling stake in energy-focused private-equity firm NGP and has since raised several pools of cash to invest in various facets of the industry.

--Alison Sider, Ted Mann and Brent Kendall contributed to this article.

Write to Dana Mattioli at dana.mattioli@wsj.com and Ryan Dezember at ryan.dezember@wsj.com

(END) Dow Jones Newswires

April 15, 2016 02:48 ET (06:48 GMT)

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