Value Created By Transocean-GlobalSanteFe Merger Greater Than the Headline Numbers?

Transocean (RIG) and GlobalSantaFe (GSF) are merging to form the largest offshore drilling company in the world, according to a report in Bloomberg.

Transocean Inc., the world's largest offshore oil and gas driller, agreed to buy rival GlobalSantaFe Corp. for about $17 billion, creating a company with a $33 billion order backlog and worldwide market reach.

Shareholders of both Houston-based companies will receive a combined $15 billion in cash, Transocean and GlobalSantaFe said today in a statement. Each will get a ratio of cash and shares in the combined company approximately equal to stock prices of the two drillers at the end of last week.

The company, to be named Transocean and governed by an equal number of board members from both sides, will have a fleet of 146 rigs, including five that are under construction. The transaction will yield annual cost savings of $100 million to $150 million by 2010, the companies said.

I am wrote this before the market opened on Monday, but noticed that the cost savings would be 3% to 5% of total market cap amortized over the next three and a half years. So what did the stocks do in the pre-market?

Shares of Transocean rose $9.04, or 8.2 percent, to $119.01 at 8:47 a.m. New York time in trading before U.S. exchanges opened. GlobalSantaFe climbed $5.66, or 7.6 percent, to $80.40. Before today, the stocks had jumped 36 percent and 27 percent, respectively, this year.

Movement in both stocks suggests that the economic value created by the merger will be much greater than the headline numbers.

Normally, the stock price of the buyer in a merger falls while the target rises. In this case, both stocks were up fairly significantly. That often is a sign of frothiness.

The deal will be in both cash and stock.

Under the agreement, billed as a merger of equals, Transocean stockholders will receive $33.03 in cash and 0.6996 share of the combined company for each of their shares. GlobalSantaFe owners will get $22.46 in cash and 0.4757 share for each share. The company will have an enterprise value, or market value plus net debt, of about $53 billion.

In this market up-cycle, most deals have been done with cash. It is interesting that this is being done, at least partially, in stock. Deals in cash are usually better indicators of value than deals in stock.

Though I'm bullish on energy, I'd be careful with the drilling companies here. I am sniffing around some of the Canadian drillers that have been crushed, but if I owned the offshore guys, I would have my finger on the trigger, and would be ready to sell in a heartbeat.

GSF vs RIG 1-yr chart:

Comments

[Mmarrkk]

You say you'd be careful with drilling companies and would have a quick trigger finger with the offshore guys. Can you give more insight into why you are worried about the offshore drillers? Just don't see any reasons in your writing to warrant the statement and wanted a bit more insight. I see long backlogs in the offshore drillers, multi-year contracts already signed at very high dayrates and utilization at close to 100%. Many companies cannot get a rig to drill their wells and have potential lease expiration problems due to the inability to find a rig that can be contracted. That would say demand is far outstripping supply, which is usually good for a supplier.