By Simon Lack
Transocean (RIG), the world’s largest operator of deepwater drilling rigs, has just provided a breathtaking example of how to destroy shareholder value. As I pointed out yesterday, when it bought Aker Drilling in August at a substantial premium, it expressed confidence that it could finance the acquisition without diluting shareholders.
The company reaffirmed this a few days later in a presentation and as recently as November 2 during their earnings call chose to downplay any possibility of issuing equity. In fact, the company asserts that their shareholders want management to invest capital in accretive projects.
So the way it's managed its shareholders’ capital is to invest $2.2 billion in a high-priced acquisition when the stock price was above $50, and then finance it by issuing equity three months later at the lowest price RIG has traded in 7 years. But it is still paying a dividend, although the secondary offering of shares just about covers it (not including an investors' taxes).
The chart below tells the story. So we own a small position in RIG, because we think the value of its assets is north of $70, but in spite of the people that run the company. In fact the stock dropped yesterday far more than was warranted by the dilution from the new shares (after all, they did receive over $1 billion for them).
We calculate that the share price should have only dropped by $0.40, to $45.50, using Monday’s closing market cap and then adjusting for the increased share count plus cash received. The further $5 discount that was required to place the new shares is now the “Newman Discount” (referencing Steve Newman, the CEO). In the months ahead we’ll see if the value of the business is up to the challenge presented by its stewards.