Transocean, GlobalSantaFe to Merge
In Deal Joining Drilling Specialists
The transaction would create a company with a combined market capitalization of $48 billion at Friday's closing prices, making it the second-largest oilfield services company after Schlumberger Ltd.
Shareholders will collect no premium in the deal, which the companies are calling a merger of equals. Shareholders in GlobalSantaFe and Transocean, which has about twice the smaller firm's market value, will get stakes in the new entity that are essentially proportional to the two companies' relative value. They will also be paid a total of $15 billion through a recapitalization that will reduce the size of their current stakes in the firms.
Analyst Dan Pickering of Pickering Energy Partners called the merger a smart move that returns cash to shareholders, boosts earnings per share and is likely to prompt other companies in the oil services sector to combine.
"Bigger is better in [a] commodity business like offshore drilling and [the] biggest guy just did some smart stuff," Pickering wrote in his morning briefing.
The transaction comes as soaring prices for oil and gas have fueled a scramble for resources, tightening the market for the equipment and expertise that oil services companies provide. Supply has been particularly tight for the deepwater drilling equipment leased by companies like Transocean, whose shares have climbed more than 50% since early January. The Philadelphia Oil Service Sector Index is also up more than 50% over that period.
Other offshore drillers considered potential acquisition candidates, including Noble Corp., Diamond Offshore and Ensco International Inc., were up 3% to 5%.
Transocean Chief Executive Robert L. Long, who will remain in that post after the merger, said the deal will result in the combined company owning 146 rigs. The two companies have a combined backlog of $33 billion.
Long described the deal as the only way Transocean could remain in the shallow-water drilling market, where rigs known as jackups dominate. Transocean has seen its jackup fleet dwarfed by competitors, as the company is unwilling to build rigs without a customer already lined up, Long said.
"For us it solves a problem we were wrestling with for a while, how to maintain our footprint with jackups," Mr. Long said in a conference call. "Ultimately we were going to have to exit [the jackup] business or acquire a significant fleet."
The deal also provides Transocean greater access to national oil companies, which have spent heavily on shallow water drilling, but with a few exceptions, have largely avoided deepwater exploration. "Saudi Aramco is the biggest operator in the world and we've been the biggest building contractor, we haven't had any presence with them at all," he said.
Under the deal's terms, Transocean shareholders will receive $33.03 in cash and 0.6996 share of the combined company for each share of Transocean they own. GlobalSantaFe shareholders will receive $22.46 and 0.4757 share of the combined company. There is no premium to GlobalSantaFe holders.
Transocean's market capitalization at Friday's close was $31.7 billion, while GlobalSantaFe was about half that at $17 billion. There will be about 318 million shares outstanding after the deal closes, expected by the end of the year.
GlobalSantaFe President and CEO Jon A. Marshall will serve as Transocean's president and operating chief. "The $15 billion cash payment allows us to achieve a more appropriate capital structure and deliver immediate value to our combined shareholders," he said.
AG Edwards analyst Poe Fratt described the deal as "probably a little bit better" for GlobalSantaFe's shareholders, as deepwater rigs are more lucrative and a faster-growing market than jackups, the company's old revenue base.
The cash for the payment to shareholders will come from a bridge loan from Goldman Sachs Lehman Brothers Inc. Group Inc. and
Drilling for DealsThe deal only intensifies merger talk in a sector where consolidation has been rumored for some time. “One of the roadblocks” to a deal in the sector “had been whether a no-premium merger would be applauded,” said Kurt Hallead, managing director with RBC Capital Markets. “I think the way TransOcean and GlobalSantaFe structured their deal sets a template. You can do a nonpremium deal, you’ve just got to give shareholders something up front to make them happy”
That “something up front” would be the huge dividend – a 30% payout – shareholders will receive under the plan.
In addition, this deal “underscores the relatively cheap valuation of some of these offshore drillers,” says Collin Gerry, analyst at Raymond James. “As long as the market continues to value [the sector] that way, you’re going to have companies with the prowess and the balance sheet” to combine.
So, what companies are likely to step up to the plate?
Diamond Offshore, Noble Corp. and Ensco are the main three U.S. companies “large enough to do this,” said Mr. Urness, though he pointed out that Diamond is majority-owned by Loews and thus is less likely to enter into a deal. “The most likely deal would be Noble and Ensco,” he said. He also entertained the idea of a three-way deal, which he said would be “unlikely” but would rival today’s deal in terms of company size.
Ensco shares are up 4.7% today, while Noble’s have gained 3.8%. Diamond’s are up 4.7%. Sector peer Atwood Oceanics jumped 7.6%.
Blogalaxia: Transocean,GlobalSantaFe
