Transocean Sedco Forex Inc. has agreed to acquire R&B Falcon Corp. in a $8.8 billion deal that would make it the third-largest oil field service company in the world-behind Halliburton Co. and Schlumberger Ltd.-as well as the largest offshore drilling contractor, officials said early last week.
Sedco Forex spin-off
Last year, Transocean Sedco Forex became the biggest offshore drilling contractor when Schlumberger spun off its Sedco Forex Offshore unit to merge it with Transocean Offshore Inc. The resulting company is currently the fourth largest oil field service firm behind Baker Hughes Inc.
The improved cash flow and savings generated by that merger provided the financial capacity for this latest combination, Transocean Sedco Forex Pres. and CEO J. Michael Talbert told analysts in a telephone conference call early last week following the merger announcement.
The acquisition, approved unanimously by directors of both companies, involves a stock swap valued at $5.8 billion, based on the Aug. 18 closing price of $57.69/ share for Transocean stock.
Under that deal, R&B Falcon stockholders will receive 0.5 share of newly issued Transocean stock for each common share of R&B Falcon stock held, with an estimated distribution of 100 million shares. In addition, Transocean will assume some $3 billion of R&B Falcon's debt.
That works out to an equivalent price of $29/share for R&B Falcon, a 16% premium over its previous closing price, said James Stone, oil field services analyst at PaineWebber.
"This deal has been speculated on for some time, and nearly everyone in the industry has looked at R&B Falcon in the past 2 years," Stone said.
Lehman Bros. analyst James Crandell also was in favor of the proposed amalgamation. In a research note, he said, "This transaction will give Transocean greater scale with 211 offshore rigs and significantly increased exposure to strong markets, such as the shallow-water Gulf of Mexico and Offshore Brazil."
The acquisition puts Transocean back into the US drilling market for natural gas in the shallower waters of the Gulf of Mexico-where it hasn't been since about 1995, when it had seven jack ups working in that area. Transocean subsequently sold those rigs to Falcon Drilling, the predecessor to R&B Falcon.
Company officials said they see those natural gas-prone waters as a growing market for drilling operations as gas supplies lag behind growing US demand. "That made this transaction more attractive now than it was 2 years ago, when all those [conventional shallow-water] rigs in the gulf were stacked," said Talbert. "We live in a world today with constraints for oil, gas, and electric energy [supplies]."
"This transaction clearly creates the world's premier offshore drilling company and enhances R&B Falcon's shareholder value substantially," said Paul B. Lloyd Jr., chairman and CEO of R&B Falcon.
That company's fleet of 139 mobile offshore rigs and drilling barges will complement Transocean's fleet of 72 medium water depth to deepwater floating drilling units, including six under construction, officials said.
However, because it's incorporated outside the US, Transocean will likely dispose of R&B Falcon's fleet of US-flagged tugs and supply barges, officials said.
The merger is expected to be immediately accretive to Transocean's cash flow. Company officials reckon the combination of the two companies will produce cost savings from both corporate and field operations, plus "economies of scale," that could total $50 million/year. They expect to achieve 25-50% of those savings in the first year.
There may be some layoffs as the two companies combine their corporate offices in Houston. However, Talbert said, "About 85% of our employees work offshore on rigs. The percentage is probably about the same for R&B Falcon. So there will be no reductions of those jobs."
With growing demand for offshore drilling in all the world markets, he said, "We need all of the talent we can get." Transocean will employ some 15,000 people worldwide after the combination is completed.
Talbert will continue as president and CEO, while Victor E. Grijalva will remain chairman of Transocean. Whether any of the R&B Falcon executives will have a role in the new company is still under review, said Transocean officials. But they said no changes are anticipated among Trans- ocean's current executives.
Officials expect to complete the merger sometime in the first quarter of 2001. But the merger may be accomplished late this year, if it breezes through all the regulatory reviews, which the companies said they expect.
Transocean's board of directors will be enlarged to 13 members, from 12 currently. The new board will consist of the 10 current Transocean members, plus three new directors assigned by R&B Falcon.
Schlumberger still holds about 52% of Transocean Sedco Forex.