On August 14th, 2017, Tesco Corporation (NASDAQ:TESO) and Nabors Industries Ltd (NYSE:NBR) announced a merger agreement where Tesco will merge into a subsidiary of Nabors. You can see the full terms of the agreement here.
Nabors Industries Ltd. is a Bermuda exempted company formed in 2001, though the company’s formal founding dates back to 1952. Nabors owns and operates the world’s largest land-based oil and natural gas drilling rigs as well as builds offshore drilling rigs around the world. The company also provides services and technology such as wellbore placement (directional drilling and measurement while drilling systems), drilling software, and related equipment in most major global markets.
Acquisitions have been crucial for Nabors' growth from purchasing rig operators and equipment businesses in the '90s to their largest yet acquisition of Superior Well Services for roughly $900 million in 2010. With that said, there are no deals in their recent past with similar size and terms as the Tesco merger.
Tesco Corporation provides products such as top drives and automated pipe handling equipment as well as tubular services to upstream companies. The company also provides research and corporate services.
The companies are a good match giving a boost to Canrig, Nabors' rig equipment powerhouse. Tesco's tubular business is also expected to assist in the growth of Nabors' drilling solutions unit fairly quickly. The reasoning behind the merger is sound, and it matches Nabors' long-running strategy of acquiring equipment and technology companies.
Though the history of communication between the firms shows that Nabors passed on a potential deal after performing due diligence in late 2015, the company appears committed now after raising its offer twice in negotiations with Tesco. It is important to observe, however, that Tesco seems to be the initiator in both instances of the companies commencing talks of a merger.
The merger is entirely stock for stock. For each Tesco share, owners will receive a fixed 0.68 Nabors share.
The deal is not contingent upon any financing arrangements.
The transaction requires the approval of US and Canadian (among other countries’) anti-trust regulators. Under the Alberta Business Corporations Act, the Court of Queen’s Bench of Alberta also needed to sign off on the final order of the arrangement after shareholder approval. In a recent 8-K, Tesco announced that the court approved the final order.
The companies filed with the Commissioner of Competition in Canada on September 15 and September 18 for Tesco and Nabors respectively. Similar to the HSR Act, Canada's Competition Act entails a waiting period of 30 days where the commissioner can make a request for additional information, issue an Advance Ruling Certificate to end the waiting period sooner, or simply let the period expire. Both firms filed with the FTC Antitrust Division on August 31 with Nabors withdrawing and refiling on October 2. In both Canada and the US, antitrust waiting periods have expired but no declarations have been made signaling that the merger is not necessarily out of the woods yet.
Antitrust concerns should be on an investor's radar in this situation. Nabors is the largest global owner/operator of land rigs followed by Helmerich & Payne, Inc. and Patterson-UTI. In 2016, revenue from H&P and Patterson-UTI were roughly 73.5% and 41.5% that of Nabors respectively. Though Nabors occupies a dominant position in the industry, it is not out of reach of its competitors. It would be strange to see significant holdup due to antitrust issues considering the size of the transaction as well. Tesco had revenue in 2016 of only about $132 million compared to Nabors’ $2.21 billion.
According to a recent 8-K, the Federal Antimonopoly Service of Russia has not yet approved the deal. This, too, would be an unlikely source of trouble for the deal seeing as Nabors' presence in Russia is quite small compared to its land-rig competitors. Antitrust developments should be watched closely, though should not create a big enough headache to stop the deal.
The agreement required Tesco shareholders to vote on the transaction. This vote took place on December 1 with shareholders deciding to approve the deal. This came as no surprise considering 16% of shares were held by insiders and 87% of the shares were held by institutions. (Most likely the overlap in percentages is due to beneficial ownership of those involved in the decision making of the institutional owners.)
The termination date of the deal is February 14, 2018, allowing for an extension to April 15 if antitrust regulators have not been satisfied. Termination is allowed if any of the covenants are violated by either party, if the required shareholder vote is not acquired, or if Tesco accepts a superior offer.
If the merger is terminated in connection with a change in board opinion or a superior proposal to Tesco, the company must pay Nabors a termination fee of $8 million. There is no situation in which a termination fee is payable from Nabors to Tesco which should not be overlooked seeing as Tesco seems to have solicited Nabors for the transaction. This may lower the overall incentive to Nabors to complete the transaction should it run into issues.
The biggest risks to the deal are Canadian or US antitrust interference as described above. If the deal is not completed, it is difficult to say where the price of TESO or NBR may trade. That being said, it is an all-stock merger, and the ratio of the stock prices is not far from what they traded at before the merger was announced (roughly 1.5 NBR to TESO vs 1.6 pre-merger). This is most likely due to their operating in similar industries with similar drivers. If an investor bought TESO and shorted the appropriate amount of NBR, their overall risk should the deal fall through would be less than most arbitrage situations.
Despite the regulatory approvals still outstanding and the Feb. 2018, termination date, the companies maintain that a December close is expected. Using current prices of $5.94 for NBR and $3.98 for TESO, and a December 31 close date, investors could reap a 1% merger arbitrage return less any interest costs for shorting NBR shares.
This potential return (just over a 12% annualized) does not come without any risks attached to it. Though it seems unlikely, Canadian or US antitrust authorities could still be reviewing the deal long after the waiting periods have expired. This may lead to a compromise that Nabors may not be willing to make in order to close the deal. The potential return compensates arbitrageurs for the low likelihood of this scenario and the downside entailed with a failure to close the deal.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: This article does not constitute a recommendation to buy or sell any security nor does it contain every piece of relevant information regarding the topic discussed. Any reader should make his/her own decision regarding their investments after examining all available information.