Oilfield services stocks have been hammered by the free fall in oil prices from their peak in Q2 2014. Halliburton’s HAL cost containment measures and its proposed merger with Baker Hughes BHI have buoyed the stock. HAL is off about 28% over the past years versus an 8% decline for the S&P 500 SPY. Over a year after the merger was announced, Halliburton is still trying to clear regulatory hurdles:

Halliburton plans to divest Baker Hughes’ offshore drilling and completions fluids division and the bulk of BHI’s completion systems, adding more assets to the list of businesses it plans to sell to appease antitrust regulators, Bloomberg reports.

HAL already had agreed to sell BHI’s core completions business, which provides equipment for controlling the flow of oil as it is readied for production, and has decided to sell most of the rest of BHI’s related completions operations at the behest of regulators, according to the report.

Secondly, regulators in Brazil and the EU are concerned the transaction could hurt competition or result in higher prices for oilfield services. Reports have now surfaced that the company might need to divest even more assets to appease Australian regulators; Australia is reportedly looking for an alternative buyer of divested assets in order to create stronger competition across various markets. As regulators require a strong number three competitor across all products in every market, the merger may be untenable. Moreover, even if the deal is approved, HAL shareholders may not win out long term for the following reasons:

Negative Arbitrage

The acquisition price for BHI is [i] 1.12 HAL shares of each BHI share and [ii] $19 per BHI share. Halliburton would also inherit Baker Hughes’s net debt of $1.7 billion. Based on Friday’s closing share prices, Halliburton would pay about $25.4 billion for BHI or over 15x its 2015 adjusted EBITDA. If Halliburton’s divested assets are sold for less than the 15x EBITDA, then is could create a negative arbitrage. While BHI’s EBITDA has fallen over 60% from $4.7 billion in 2015 to $1.7 billion in 2015, the deal value hasn’t fallen in lockstep.