In the offshore drilling business, bigger is often better.
The world's two largest offshore drillers, GlobalSantaFe (GSF) and Transocean (RIG), announced plans to merge Monday. The deal would create a $53 billion company, named Transocean, operating 146 rigs in oceans all around the world.
"We will be positioned to better offer the full scope of drilling services to customers in all geographical areas," Transocean CEO Robert L. Long said in a statement.
Being bigger helps in a business where one drilling rig can cost $640 million. "Having a larger balance sheet helps a lot when you have a capital-intensive business," says Michael Drickamer, an analyst at Morgan Keegan.
The deal essentially creates a new capital structure for the two companies, with a lot more debt. The new firm will pay out $15 billion to shareholders.
For each share they own, Transocean shareholders will get $33.03 in cash and 0.6996 shares in the new company. GlobalSantaFe shareholders receive $22.46 per share in cash and 0.4757 shares of the combined company.
Rig operators like the new Transocean can borrow so much because they have a huge stream of cash coming in. The new company has a combined revenue backlog of $33 billion.
The deal helps ease concerns that the companies didn't have enough debt, says Judson Bailey, an analyst at Jefferies. "The knock on this industry and some of these larger companies is they were very under-leveraged," he says.
The firms expect a merged Transocean will find between $100 to $150 million in cost saving per year by 2010.
But Bailey says the savings in increased efficiency are a minor consideration. However, the deal might help Transocean better weather a downturn, he says.
Thanks to high oil prices, offshore oil drilling is definitely not in a downturn now. Companies are building hundreds of new offshore rigs to satisfy the energy demand.
Transocean's stock was up 36% this year, even before the announcement of the deal, while GlobalSantaFe shares had risen 27% this year. After the deal was announced, GlobalSantaFe shares rose 4.8% to $78.33, after hitting a new 52-week high during trading of $81.19. Transocean spiked 5.5% to $115.96, after touching a new 52-week high during the session of $120.88.
Neither Drickamer or Bailey believes there is much threat to the deal, either from antitrust regulators or from alternate bidders. The new firm, with 20,000 employees, would remain headquartered in Houston.
The $53 billion deal is part of a worldwide wave of mergers and acquisitions. In the second quarter, more than $1.5 trillion in M&A deals were announced, according to CapitalIQ. That's up from $763.4 billion in the same quarter a year ago.