How Much Upside Will Baker Hughes Buyout Give Halliburton?

• Halliburton Company HAL's merger with Baker Hughes Incorporated BHI could be 20 percent accretive to Halliburton's 2018 earnings, according to Sean Meakim of JP Morgan.
• Meakim added the merger could yield a valuation range for Halliburton in the $55-$60 range.
• Meakim noted the deal is progressing "slowly" but "steadily."

Halliburton's proposed acquisition of Baker Hughes represents the largest merger in the sector's history and approaches its one-year anniversary, prompting Sean Meakim of JP Morgan to reaffirm Halliburton as a "top pick" within the oil services and equipment sector.

In a report published Monday, Meakim stated that the proposed deal between Halliburton and Baker Hughes is progressing "slowly" but "steadily" with the merger "likely" to close in the first quarter of next year. To prepare for the merger, Halliburton already stated that bidding for its directional drilling and drill bits units has attracted "strong" interest, while the analyst is expecting final bids to occur "imminently" with another round of divestitures to follow.

Meakim said the integration of the two global diversified service providers will be a "tall order" over the next few years and cost synergies are still projected to exceed $2 billion with the combined company's tax rate normalizing over time to Halliburton's 27-28 percent (versus Baker Hughes 33 percent rate). The analyst is also estimating a 200 basis point of margin uplift by 2018, which could yield $400 million of incremental EBIT.

Finally, Meakim noted that is pro forma base case analysis indicated Halliburton should see a nearly 20 percent accretion to its 2018 earnings per share, implying a valuation as much as $60 per share. On the other hand, the analyst's standalone December-2016 price target stands at $51. In the event the merger falls through, Halliburton's stock should find support in the $30 to $33 range, while Baker Hughes stocks could trade in the $35 to $45 range, even after factoring in a $3.5 billion breakup fee.

Bottom line, fears of a break-up are "overstated" as the merger rationale "remains compelling."