HAL.WD Halliburton

The Justice Department is preparing to file an antitrust lawsuit to block a proposed merger between Halliburton Co. and Baker Hughes Inc., according to a person familiar with the matter.

The lawsuit could come anytime, this person said.

Halliburton and Baker Hughes signed a $35 billion merger agreement in 2014, not long after the time oil prices started to tumble.

Initially the companies projected confidence that resolving antitrust concerns raised by the combination of world's second- and third-largest oil-field-services firms, behind Schlumberger Ltd., would be straightforward.

"We wouldn't have done this deal if we didn't believe it was achievable from a regulatory standpoint," Halliburton Chief Executive Dave Lesar said when the deal was announced.

Halliburton declined to comment Tuesday. Baker Hughes couldn't immediately be reached for comment.

Halliburton agreed to a steep $3.5 billion termination fee if regulatory opposition derailed the deal, and the companies said they would be willing to jettison businesses that have generated as much as $7.5 billion in revenue.

But 2015 came and went without indication that several antitrust authorities around the world were prepared to sign off. In December, the U.S. Justice Department held off on deciding whether to approve the merger, but didn't move to block it. The companies said regulators weren't satisfied with their proposal to sell businesses that generated more than $5 billion in revenue, forcing them to propose hiving off additional businesses.

The Justice Department signaled this week that it still had concerns. In a lawsuit filed Monday against ValueAct Capital Management LP, an activist hedge fund that took stakes in both companies after the deal, the department noted that the merger "threatens to substantially lessen competition in numerous markets."

In January, the European Commission, the European Union's top antitrust authority, started an in-depth investigation into the combination, citing concerns that the combination would eliminate one of the few integrated firms that can provide a suite of services in the oil patch, leaving customers with fewer, and more expensive options. Last month the commission suspended this review saying it needed more information from Halliburton.

Under the terms of the merger agreement, the companies can extricate themselves from the deal after an April 30 deadline, but the agreement doesn't automatically expire after that date.

Halliburton has said combining forces with Baker Hughes will create a stronger, more efficient company—helping its customers keep costs down in the face of lower oil prices.

"We strongly believe the proposed merger is good for the industry and for our customers," Halliburton's CEO Mr. Lesar said earlier this year. The company has said it remains committed to the deal despite the delays and is cooperating with antitrust authorities.

But analysts and observers have questioned whether the deal still makes sense after all this time. In the year and a half since the announcement, the oil and gas industry has been gutted by a prolonged period of low prices.

Baker Hughes has been "constrained in its cost-cutting" by the merger agreement, which could continue to hold it back. That "begs the question of whether such performance can be fixed by Halliburton if and when the merger goes through," analysts at Jefferies LLC wrote Tuesday.

Halliburton might be better off paying the breakup fee, some have suggested.

"The timing of the deal wasn't ideal and many shareholders have questioned the richness of the $19 a share cash component, as well as owning a company through an integration process that could very well last several years," Evercore analyst James West wrote.

"The longer this impasse persists, the less likely this transaction will be successfully consummated," Piper Jaffray analysts wrote in a research note last month. "Everything about this transaction has become more complicated."

Shares of Baker Hughes fell nearly 5% to $39.41 Tuesday afternoon, while Halliburton rose about 1.5% to $34.50.

Write to Brent Kendall at brent.kendall@wsj.com and Alison Sider at alison.sider@wsj.com

(END) Dow Jones Newswires

April 05, 2016 15:25 ET (19:25 GMT)

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