The Accretive Value Of Acquiring Vantage Drilling

| About: Vantage Drilling (VTG)

Vantage Drilling Company (NYSEMKT:VTG) is an offshore drilling services provider whose stock is considerably undervalued by investors largely due to the size of its current debt burden. This article analyzes the accretive value of a hypothetical buyout by three of VTG's competitors whom I consider possible buyers: Diamond Offshore (NYSE:DO), Noble Drilling (NYSE:NE), and Ensco PLC (NYSE:ESV).

As of the most recent quarter, VTG had total debt of $1.24B and a quarterly interest expense of $37M, putting its effective interest rate somewhere in the neighborhood of 11.9% annualized. The same figures for DO, NE and ESV are:

Total Debt $1.5B $4.9B $2.7B
Interest Expense $15.8M $54.5M $11.5M
Annual Rate 4.2% 4.4% 1.7%

All else being equal, applying those costs of capital to the VTG debt we get marginal quarterly interest expenses of $13.2M, $13.8M,and $5.3M for DO, ESV, and NE, respectively. Here's the same table with these marginal expenses added in:

Total Debt $2.74B $6.14B $3.94B
Interest Expense $29.0M $68.3M $16.8M
Annual Rate 4.2% 4.4% 1.7%

These marginal interest expenses are well within the capabilities of all three companies to absorb given their current cash flow levels. And netting out the difference between what VTG is currently paying for its assets versus what each potential buyer would be paying gives us this summary table of accretive value:

VTG Interest Expense $37.0 $37.0 $37.0
Marginal Interest Expense $13.2 $13.8 $5.3
Net Accretive Value $23.8 $23.2 $31.7
Annualized $95.3 $92.8 $126.8

In all three cases, the value of a buyout on refinancing alone exceeds $90M annually. Given that VTG currently trades at $1.25 per share, that $90M represents almost 25% of VTG's market value. Add this to the fact that VTG trades at 52% of book value and one can see how undervalued it is and why it looks like such an attractive candidate for a buyout.

All figures taken from Yahoo! Finance for most recent quarter.

Disclosure: I am long VTG.

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