Dec. 17 (Bloomberg) -- National Oilwell Varco Inc., the largest U.S. maker of oilfield equipment, agreed to acquire Grant Prideco Inc. for about $7.4 billion to gain drilling pipes and bits to tap deposits beneath the ocean floor, where the biggest reserves can be found.

National Oilwell will pay $23.20 in cash and 0.4498 of a share for each Grant Prideco share, equal to $58 each, or 22 percent more than the Dec. 14 closing price, according to a statement today from Houston-based National Oilwell. The company, which builds derricks, pumps, motors and electronic equipment, fell 8.6 percent, the biggest decline since Nov. 12.

The acquisition will give National Oilwell new products and the financial strength it needs to develop technology, Chief Executive Officer Pete Miller told analysts on a conference call today. Spending by producers to search for oil and gas next year is expected to rise 11 percent to a record $369 billion, Lehman Brothers Holdings Inc. estimated in a Dec. 7 report.

``National Oilwell gets one of the best drill-bit businesses and a drill-pipe business with a large market share,'' said Roger Read, a Houston-based analyst for Natixis Bleichroeder, who rates National shares at ``hold,'' Grant Prideco at ``buy'' and owns neither. He'd estimated Grant Prideco's value at $72 per share.

Grant Prideco, with 25 manufacturing sites around the world, controls 60 percent of the global market for drill pipe, or the spinning pipes that turn a drill bit and circulate fluids into a well, said Maxime Carmignac, who manages $18 billion at Carmignac Gestion in Paris, including shares of both companies.

$8 Billion Backlog

Rising oilfield spending by crude and natural-gas producers pushed National Oilwell's order backlog to $8 billion at the end of September from $7.2 billion at the end of June. National Oilwell said it expects cost savings of $40 million per year in the combined company.

National Oilwell is also getting Grant Prideco's ``game- changing'' piping that can transmit high-speed data from the wellhead to the surface, Read said. The system, commercially available since last year, can handle thousands of times more information than the best method previously available, according to the U.S. Department of Energy.

Faster data allows a driller to know more about conditions at the bottom of the hole to better direct the drill head and may reduce drilling frequency and costs, the department said.

``I can't overemphasize the technological advantages they have in their businesses,'' Miller said of Grant Prideco.

2008 Earnings

The acquisition should add about 5 percent to National Oilwell's 2008 earnings per share, Dan Pickering, an analyst with Tudor, Pickering, Holt & Co. in Houston, said in a note to clients.

Grant Prideco rose 14 percent, or $6.45, to $53.91 in New York Stock Exchange composite trading. National Oilwell fell $6.68 to $70.69. Grant Prideco and National Oilwell were the first- and third-most actively traded energy stocks measured by volume, respectively. They were second and third by value.

National Oilwell's stock has more than doubled this year, making it the best performer on the S&P 500 as oil companies such as Exxon Mobil Corp. boost spending to reach fields deep under the ocean because access to more traditional reserves is limited by countries such as Russia and Venezuela.

Fidelity Management is the largest holder of National Oilwell's shares, with 14 percent of stock outstanding as of Sept. 30, according to Bloomberg data. Sands Capital Management Inc. is the second-largest holder with 4.1 percent, followed by Barclays Global Investors with 3.9 percent.

Industry Acquisitions

The acquisition is the biggest in the oilfield-services industry this year, where $43 billion in deals have been announced or completed worldwide, according to Bloomberg data. That compares with $27.3 billion for all of 2006.

Grant Prideco will bolster National Oilwell's product line with its drill pipe, which accounts for about 66 percent of Grant Prideco's revenue, Carmignac said.

``National Oilwell sells packages to drillers, and drill pipe was the only high-margin piece they didn't have,'' Carmignac said. ``Drill pipe has a lot of leverage to the ultra deepwater drilling business.'' The number of rigs capable of drilling in water depths of more than 7,500 feet will triple from the current 32 by 2009, she said.

National Oilwell plans to finance the deal through cash and debt. Grant Prideco's shareholders are expected to vote on the deal late in the first quarter or early in the second quarter. Goldman, Sachs & Co. acted as financial adviser to National Oilwell, and Credit Suisse Securities LLC advised Grant Prideco.

Break-Up Fee

Grant Prideco agreed to pay a break-up fee of $185 million should it cancel the agreement, the company said in a filing with the U.S. Securities and Exchange Commission.

National Oilwell expects to have a 15 percent debt-to- capital ratio compared with total market capitalization after the acquisition is completed and final financing is in place, National Oilwell's Chief Financial Officer Clay Williams told analysts.

Grant Prideco was spun off from Weatherford International Inc., the fourth-largest oilfield contractor, in 2000 and went public later that year. National Oilwell was formed in 2005 when National-Oilwell Inc. acquired Varco International Inc. for $4.4 billion.

To contact the reporters on this story: Jim Polson in New York at jpolson@bloomberg.net; Jim Kennett in Houston at jkennett@bloomberg.net.

Last Updated: December 17, 2007 17:59 EST