Transocean Sweetens The Share-For-Unit Merger Deal With Transocean Partners By 5%

| About: Transocean Ltd. (RIG)

Summary

The new deal for the share-for-unit merger will be 1.2 RIG share for 1 RIGP share, instead of 1.1427 RIG share for 1 RIGP share. An increase of 5%.

The reason was due to the failure to receive the 50.1% necessary to approve the merger, on November 11, 2016.

This merger is now an even better deal for RIGP, and I continue to believe that this merger is basically neutral for Transocean shareholders.

This is an update of my preceding article on Transocean Partners (NYSE:RIGP) on August 1, 2016.

Image: Drillship Discoverer Inspiration owned by RIGP.

Today, November 21, 2016, Transocean Ltd. filed an 8-K filing indicating the following:

[...]Transocean Ltd., a Swiss corporation ("Transocean"), Transocean Partners LLC, a Marshall Islands limited liability company ("Transocean Partners"), Transocean Partners Holdings Limited, a Cayman Islands exempted company and an indirect, wholly owned subsidiary of Transocean ("Transocean Holdings") and TPHL Holdings LLC, a Marshall Islands limited liability company and a direct, wholly owned subsidiary of Transocean Holdings ("Merger Sub") entered into an Amendment (the "Amendment") to the Agreement and Plan of Merger, dated as of July 31, 2016 (the "Merger Agreement"), among Transocean, Transocean Partners, Transocean Holdings and Merger Sub, pursuant to which Merger Sub will merge with and into Transocean Partners (the "Merger"), with Transocean Partners surviving the Merger as an indirect, wholly owned subsidiary of Transocean. The Amendment increased the exchange ratio from 1.1427 Transocean shares for each Transocean Partners common unit not owned by Transocean or its subsidiaries to 1.2000 Transocean shares[...]

What was the Agreement and Plan of Merger dated as of July 31, 2016?

Transocean Ltd. (NYSE:RIG) announced the following:

Announced that Transocean has agreed to acquire all of the outstanding common units of Transocean Partners not already owned by Transocean in a share-for-unit merger transaction. In the merger, Transocean Partners common unitholders will receive 1.1427 Transocean shares for each Transocean Partners common unit. The Transocean Partners unit price implied by the exchange ratio represents a 15% premium to Transocean Partners' closing price on July 29, 2016. Transocean expects to issue approximately 22.7 million shares in the merger. Completion of the transaction is conditioned upon approval by Transocean Partners' common unitholders and is anticipated to close in the fourth quarter of 2016.

What are the different entities in play here?

  1. Transocean Ltd., a Swiss Corporation.
  2. Transocean Partners LLC (subsidiary of Transocean Ltd.), a Cayman Islands exempted company.
  3. TPHL Holdings LLC, a Marshall Islands limited liability company.
  4. "Merger Sub", a direct, wholly owned subsidiary of Transocean Holdings.

Amendment:

"Merger Sub" will merge with and into Transocean Partners (the "Merger"), with Transocean Partners surviving the Merger as an indirect, wholly owned subsidiary of Transocean.

And the share-for-unit merger will be 1.2 RIG share for 1 RIGP share, instead of 1.1427 RIG share for 1 RIGP share.

It is an increase of 5% of the initial deal.

The reason was due to the failure to receive the 50.1% necessary to approve the merger, on November 11, 2016.

The affirmative vote of approximately 50.1% of the outstanding common units not owned by Transocean Partners Holdings Limited is required to approve the merger. At the time of the adjournment, a preliminary count indicated approximately 46.8% of the outstanding common units not owned by Transocean Partners Holdings Limited intended to vote in favor of the merger[...]

Apparently, the problem was "Merger Sub" and the amendment will allow the deal to be completed.

Following completion of the transaction, Transocean Partners will be 100% owned by Transocean and therefore, Transocean will have indirectly acquired the 51% ownership interests in the Discoverer Inspiration, the Discoverer Clear Leader and the Development Driller III that are currently owned by Transocean Partners. Additionally, Transocean Partners' common units will cease to be publicly traded on the NYSE.

The Transocean Partners special meeting, which has been adjourned, reconvenes on Tuesday, December 6, 2016.

Based on the closing price on Monday the offer values RIGP at $13.992 a share. In short, Transocean is buying approximately 19.7 million shares of RIGP and will issue approximately 23.7 million of RIG shares.

Transocean will fully own again the UDW Deepwater Inspiration, the Discoverer Clear Leader and the Deepwater Driller III.

Complete Fleet Status as of October 24, 2016

To view the most recent fleet status, click here.

High-Specification Floaters: Ultra-Deepwater

High-specification Floaters

Ultra-deepwater Rigs

7,500'/12,000'-30,000'/40,000'

Year built Ship or Semi

Contract

End

Current

Day Rate

K $

Operator

Location

Day-off

1 Discoverer Clear Leader 2009

Ship

10/18

581

[Chevron] US GOM

2 Discoverer Inspiration 2010

Ship

3/20

585

[Chevron] US GOM

3

Development Driller III

Still drilling per Rigzone.

2009 Semi 11/16 422

[BP]

US GOM

Click to enlarge

A few positives to consider (synergy):

1 - As we can see the Discoverer Clear Leader and Discoverer Inspiration are bringing excellent contract at nearly $600k/d which will help RIG cash flow.

Assuming that the transaction will be effective before end of 2016, I calculated (back of an envelope type), a total backlog for the three rings of about $1.1 billion, in which approximately $570-600 million in contract backlog will be added to Transocean backlog.

2 - The cash distribution paid to RIGP shareholders of about $28.57 million annually will cease to exist.

3 - This merger will save the new Transocean about $10 million in administrative costs related to RIGP.

A few negatives to ponder:

1 - By merging RIGP back into RIG, Transocean is paying an even higher price for the three rigs under contract, that could be estimated at well over $520 million "on paper", whereas, the street value or fair value may well be a little under $280 million, in my opinion.

Of course, the valuation of Discoverer Inspiration contracted until 2020, and the Development Driller III rolling off contract soon, unless a contract extension - should be different.

2 - Transocean is adding approximately (19.7 million shares x 1.20) or ~23.7 million shares to the actual share outstanding of the company. This is a dilution of 6.48% based on an actual outstanding of 365.2 million shares.

Conclusion:

Nevertheless, this merger is now an even better deal for RIGP and I continue to believe that this merger is basically neutral for Transocean shareholders.

However, I have sold out my entire RIGP position in August - at well over $12 - that I owned at an average a little below $8.75. However, this amendment is reminding me again, the Importance of Thinking Before Acting.

Nevertheless, this merger is now an even better deal for RIGP recent shareholders, thanks to "Merger Sub".

Important note: Do not forget to become one of my followers with RIG and the entire offshore drilling sector. Thank you!

Disclosure: I am/we are long RIG.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.