By Swetha Gopinath and Sneha Banerjee
(Reuters) - Growing doubts that regulators may not approve Halliburton Co's $35-billion takeover of fellow oilfield services company Baker Hughes Inc this year has thrown up a high-reward opportunity for investors with an appetite for risk.
Typically, investors make money on mergers by picking up shares of the target company once the stock has steadied following their initial surge after the deal is announced. They sell when the shares touch the offer price just a few days before the deal closes, making money off the difference.
Baker Hughes' stock was trading at a discount of 8 percent to $67, which is what Halliburton's cash-and-stock offer was valued as of Tuesday's close. This spread has widened over the past three months as several big deals have fallen apart amid anti-trust concerns.
The two companies on Friday agreed with the U.S. Department of Justice to extend the date of the department's review of the deal. The transaction, which was supposed to close in the second half, is now expected to close by Dec. 1.
But merger experts said the wide spread means the market remains less confident the deal will be completed this year.
"(The agreement) does not remove any regulatory risk as the approval has still not yet been received," said Roy Behren, portfolio manager at Westchester Capital Management.
The risk has created an unusually attractive opening for arbitrageurs to make money by buying Baker Hughes shares while short-selling those of Halliburton.
Halliburton's shares have fallen about 17 percent to $42.56 since the deal was announced.
Several big deals have fallen through in recent months amid indications that they would be blocked by anti-trust regulators.
Most recently, Comcast Corp abandoned its all-stock $45 billion offer for Time Warner Cable Inc.
The Baker Hughes-Halliburton deal is being scrutinized by regulators in several countries because the companies have overlapping businesses in the United States, Asia and Europe.
Halliburton, which is counting on the purchase of its smaller rival to cope with a drop in exploration and development spending, has said it is willing to divest businesses.
Based on current share prices versus the original offer, the market is pricing in a 65-70 percent chance of the Halliburton-Baker Hughes deal going through, said Edward Jones analyst Rob Desai.
Usually, about 90 percent of deals close, analysts said.
"It's a wide spread, which people might want to take advantage of," said Westchester Capital's Behren.
Behren thinks the deal will close, but he and other investors are hedging risk by shorting Halliburton shares, which will fall if the deal collapses.
Short-sellers borrow shares to sell in anticipation that the price will fall. When it does, they buy back the stock and return it to the original owner, pocketing the difference.
Nearly 6 percent of Halliburton's stock was held by short-sellers as on June 30, compared with less than 2 percent before the deal was announced on Nov. 17.
At current share prices, betting on the deal offers an 18 percent annualized rate of return, said Behren, who assumes the deal will close by the end of the year. A less-risky deal would be yielding in the mid-single digits, he said.
(Editing by Sayantani Ghosh)