July 23 (Bloomberg) -- Transocean Inc. agreed to buy GlobalSantaFe Corp. for about $17 billion, combining the world's two largest offshore oil and gas drillers in a market where demand for rigs has never been higher.

The new company will be triple the size of its largest peer by sales, Noble Corp., with 146 rigs and an order backlog of $33 billion. In a statement, Transocean and GlobalSantaFe, both based in Houston, called the transaction a merger, with shareholders getting a combined $15 billion in cash.

Robert Long, who will remain chief executive officer, said the deal will give Transocean a full range of drilling and a global reach. Rig rates are rising as producers press their search for reserves to deeper waters. A rig shortage is hindering exploration, contributing to near-record oil prices.

``Demand is excellent for deepwater rigs,'' said Michael Breard, an analyst with Hodges Capital Management Inc. in Dallas. The Hodges fund includes $730 million in equities and holds shares of both Transocean Inc. and GlobalSantaFe Corp. ``They've got a $33 billion backlog -- money is the least of their problems.''

Shares of Transocean had their biggest gain since Sept. 1, rising $5.99, or 5.5 percent, to $115.96 in New York Stock Exchange composite trading. GlobalSantaFe climbed $3.59, or 4.8 percent, to $78.33, its biggest increase since May 11.

Rents for deepwater rigs rose 13 percent from a year earlier to a record June average of $494,957 a day, ODS- Petrodata Inc. reported.

Cash Payouts

Transocean stockholders will get $33.03 in cash and 0.6996 share of the combined company for each of their shares, the drillers said today in their statement. GlobalSantaFe owners will get $22.46 in cash and 0.4757 share. Shareholders on neither side are getting a premium for their stock.

The company will have an enterprise value, or market value plus net debt, of about $53 billion. The $33 billion order backlog is for drilling contracts extending as far out as 2015.

``It monetized some of that giant backlog that's out there,'' Roger Read, an analyst at Natexis Bleichroeder in Houston, said of the merger agreement.

Each company will contribute seven members to the combined company's board. The company will keep Transocean's name. The transaction will lead to $100 million to $150 million in annual cost cuts by 2010, the companies said.

Combining Strength

``What you've done is take the two highest-quality asset bases out there and the best management teams and put them together,'' said Doug Hohertz, who helps manage $600 million in assets, including Transocean and GlobalSantaFe shares, at The Mitchell Group in Houston.

Michael Drickamer, an analyst at Morgan Keegan & Co. in Memphis, Tennessee, said giving cash to shareholders through the merger makes sense because the drillers were earning money faster than they could reinvest it in their businesses.

The deal will put pressure on other companies in the industry to do the same, said Drickamer, who rates Transocean and GlobalSantaFe shares at ``outperform.''

The combined company will own 29 rigs capable of drilling in water depths of more than 5,000 feet, according to Jud Bailey, an analyst at Jefferies & Co. There are currently about 70 such rigs in the world, and there are almost that many under construction.

`Shocked' by Takeover

Bailey, who rates Transocean at ``hold'' and GlobalSantaFe at ``buy,'' said he was ``shocked'' by the takeover. Transocean was ``the dominant player in the deepwater market, but at 60 new deepwater rigs being built, and they only had four of them, they were going to lose market share over the next five years,'' he said. ``That's what compelled this.''

GlobalSantaFe's CEO, Jon Marshall, will be president of the combined company. The transaction is scheduled to close by the end of this year, pending approval by shareholders.

Combining forces will give the company more chances to get contracts with government-owned oil companies, ``which are an increasingly important part of the worldwide customer mix,'' Marshall told investors and analysts on a conference call.

Long said the company may sell ``miscellaneous'' equipment but doesn't plan any ``significant'' divestitures.

The agreement would allow GlobalSantaFe to entertain other offers, Long said. Marshall said the deal's breakup fee is small enough that it wouldn't stand in the way of a superior offer.

Competitive Markets

Bailey and other analysts said combining the two largest offshore drillers won't raise monopoly concerns because the business is too global and competitive for any one contractor to have a stranglehold on any particular market.

Mergers within the industry have historically been successful. GlobalSantaFe is the result of a merger between Santa Fe International Corp. and Global Marine Inc. in 2001.

``We have the potential to be much greater than the sum of our parts,'' Marshall said.

Hercules Offshore Inc., a driller in the Gulf of Mexico, agreed to purchase rival Todco for $2.3 billion in March 19. Shares of Hercules have climbed 16 percent since the announcement.

Investors said consolidation is usually a good sign. ``The stock can go a lot higher,'' said Breard of Hodges Capital.

Goldman, Lehman

Goldman, Sachs & Co. is advising Transocean on the transaction, and Lehman Brothers Inc. is adviser for GlobalSantaFe. Affiliates of the two firms also will arrange financing of the $15 billion in payouts to shareholders.

The payouts should prompt other drillers to return money to shareholders through dividends or stock buybacks, said Maxime Carmignac, who counts shares of Transocean and GlobalSantaFe Corp. among the 12 billion euros ($16.6 billion) in assets she helps oversee at Carmignac Gestion in Paris.

``These companies have been sitting on huge amounts of cash but have not been returning cash to shareholders,'' she said.

To contact the reporter on this story: Amy Strahan in Houston at astrahan@bloomberg.net.

Last Updated: July 23, 2007 16:12 EDT