Transocean Icahn Defense Seen With Deal Focus: Real M&A

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Transocean Ltd., the offshore oil driller under pressure from billionaire Carl Icahn to boost its dividend, would be better off using some of its extra cash on acquisitions to shore up lagging growth.

Transocean, owner of the Deepwater Horizon rig that exploded three years ago in the Gulf of Mexico, is projected to increase revenue more slowly through 2016 than 87 percent of similar-sized peers, according to data compiled by Bloomberg. Transocean should use its $5.1 billion in cash -- the most in at least 22 years -- to pursue a deal that would upgrade its fleet and improve sales growth, rather than accede to Icahn’s demand for a larger dividend, Iberia Capital Partners LLC said.

“If you’re trying to do things for your shareholders, growth is an important part of that story,” Brad Handler, a New York-based analyst at Jefferies Group LLC, said in a telephone interview. An acquisition, along with Transocean’s planned dividend, is “a better long-term solution,” he said.

Transocean, which has a market value of $19 billion, could obtain more modern rigs and faster revenue growth by buying Ocean Rig UDW Inc. or Pacific Drilling SA, said Cowen Group Inc. The Vernier, Switzerland-based company could pay as much as $5.8 billion in cash and stock for a takeover without jeopardizing its credit rating, and even a smaller purchase of a company such as Vantage Drilling Co. would boost earnings, said Handler.

Icahn Stake

Guy Cantwell, a spokesman for Transocean, declined to comment on the company’s interest in acquisitions beyond statements made at an energy conference in New Orleans this week by Chief Executive Officer Steven Newman.

“We’re open to building or buying, whatever makes the most economic sense,” Newman said at the conference.

Icahn didn’t respond to an e-mail or phone request for comment left with an assistant.

The activist is Transocean’s biggest shareholder with a 5.6 percent stake. He disclosed an investment in the company in January, the same month the rig operator agreed to pay about $1.4 billion in penalties for its role in the Gulf oil spill.

Icahn then called on Transocean, which had discontinued its dividend in 2012, to issue an annual payout of at least $4 a share, or $1.4 billion.

Instead, Transocean’s board proposed this month that the company reinstate its dividend at $2.24 a share and accelerate debt repayment, saying a larger payout to shareholders would be “overly aggressive and detrimental to the company’s long-term performance.” Transocean said it still faces uncertainties related to the Gulf oil spill, among other things.

Proxy Fight

Icahn is still pushing for the $4-a-share dividend and is asking shareholders to support his plan, as well as the election of three new directors. Shareholders will vote on the dividend proposals at the company’s annual meeting in May.

Today, Transocean shares gained 1.4 percent to $52.97.

Rather than paying the larger dividend, Transocean should preserve cash to guard against future liabilities and help make its rig fleet more competitive, said Trey Stolz, a New Orleans-based analyst at Iberia Capital. The quickest way to get newer, better rigs is to buy them, he said.

Other deep-water drillers have “upgraded a higher percentage of their fleet over the last few years and into the next few years,” Stolz said. “Transocean doesn’t have quite the same exposure.”

Purchasing a company with more modern rigs would help trim Transocean’s maintenance costs and allow it to charge higher rates to customers, according to J.B. Lowe, a New York-based analyst at Cowen.

Slower Pace

With analysts projecting an average annual growth rate of

5.5 percent through 2016, Transocean’s revenue is poised to increase at a slower pace than 87 percent of oil and gas services companies valued at more than $5 billion, according to data compiled by Bloomberg. In addition, Transocean has posted net losses the past two years.

An acquisition of Houston-based driller Rowan Cos. would boost Transocean’s per-share earnings by as much as 17 percent in 2016, Handler of Jefferies estimated in a March 15 report.

Rowan is an attractive target for Transocean because of its deep-water drilling assets, Handler said. It also offers the chance for Transocean to gain a foothold once again in the jack-up, or shallow-water rig market, he said.

A takeover of Rowan may cost Transocean at least $5.8 billion, or about a 35 percent premium to its closing price yesterday, Handler said.

No Surprise

While Rowan isn’t seeking a sale, “it’s not a surprise that people think of us, at our size, as an acquisition target,” CEO Matt Ralls said in an interview at the New Orleans energy conference this week. “If someone wants to come along and make an attractive offer, we’ll take it to the shareholders. But we don’t want to see that happen.”

Buying Houston-based Vantage Drilling for $655 million would be more digestible and still raise Transocean’s per-share earnings by 10 percent in 2014, Handler said. That price tag would be more than a 30 percent premium to yesterday’s close.

Today, Rowan shares rose 1.3 percent to $34.83, while Vantage Drilling rose 4.2 percent to $1.73.

Transocean may be more likely to be lured to pure-play deep-water drilling companies such as Ocean Rig and Pacific Drilling to meet demand, Lowe of Cowen said.

“The way the industry has been going for the past five years is they’re going farther off shore and they’re going deeper,” he said.

Takeover Values

Lowe said a buyer would have to pay more than his estimated net asset value of $24 a share for Ocean Rig, at least a 54 percent premium to yesterday’s closing price. Pacific Drilling may lure at least a 33 percent premium, he said.

Today, Ocean Rig rose 0.6 percent to $15.73, while Pacific Drilling rose 2.1 percent to $9.60.

Representatives for Pacific Drilling and Vantage Drilling didn’t return phone messages or e-mails seeking comment, while representatives for Ocean Rig weren’t immediately available to comment.

While an acquisition could help Transocean upgrade its fleet quickly, takeover targets may demand higher premiums than the company is willing to pay, said John Keller, a Houston-based analyst at Stephens Inc. It may benefit the company to hold on to some of its cash and wait until the market faces its next downturn, he said.

“I don’t think in a cyclical industry like this that you necessarily should feel urgency to really expand your fleet,” Keller said in a phone interview. “My preference would be to see them invest in growth at returns that make sense, not just growth for growth’s sake.”

Growth Jumpstart

Still, Handler of Jefferies estimates that even paying $5.8 billion for Rowan’s equity and taking on its $2 billion in debt to gain its fleet would be cheaper than building the equivalent number of new rigs. For Transocean, it could be an investment worth making, he said.

Transocean “needs to focus on longer-term growth prospects,” Handler said. “Because it hasn’t been able to do that as consistently as its peers, it needs to jumpstart longer term growth and that’s where M&A comes in.”