Transocean, GlobalSantaFe combining

The world's largest offshore drilling contractor got bigger with Monday's announcement by Transocean that it will combine with GlobalSantaFe, creating a company able to drill globally from shallow to ultra-deep waters.

Analysts largely applauded the coupling and said more combinations could be forthcoming. The shares of both companies rose.

The deal, announced jointly by both Houston-based companies, includes a $15 billion cash payout to shareholders of both the world's largest contractor, Transocean Inc., and GlobalSantaFe Corp. Shareholders of both companies will also get shares in the new company, which will retain the Transocean name and trade on the New York Stock Exchange under Transocean's symbol "RIG."

The value of the new company will be about $53 billion, including debt. The $15 billion for the cash payout to shareholders will be funded through a bridge loan due one year after closing.

Transocean Chief Executive Robert Long, who will continue as CEO of the combined company, said the deal will allow the company to keep pace as the industry expands and to "assure us of a leading presence in almost every major offshore drilling province in the world."

"We'll also benefit from economies of scale leading to cost reduction," Long said in a conference call, which the company said could amount to $100 million to $150 million a year by 2010.

GlobalSantaFe CEO Jon A. Marshall will serve as president and chief operating officer of the combined entity, while GlobalSantaFe Chairman Robert Rose will be chairman. The two companies will be equally represented on a new 14-member board.

Marshall said the combination gives the new Transocean a broader customer base, particularly with state-owned national oil companies, which control almost 90 percent of global oil reserves. It also will give Transocean greater exposure in the growing and lucrative deepwater drilling market.

The combined company will have a global fleet of 146 rigs, including harsh-environment jackups for shallower waters and ultra-deepwater drillships. Oil companies are heading for deeper waters worldwide as the competition to find new sources of hydrocarbons intensifies.

"We like it," Dan Pickering of Pickering Energy Partners wrote in a research note. "Bigger is better in commodity business like offshore drilling and biggest guy just did some smart stuff."

Bear Stearns analyst Robin Shoemaker called the combination "a win both strategically and financially," and noted the combined company's fleet will represent about 25 percent of the 600-rig global offshore fleet.

Pickering and Shoemaker said the merger could accelerate industry consolidation in the coming months. Pickering listed Houston-based Pride International Inc., Bermuda-based Seadrill Ltd. and some Norwegian outfits as potential consolidation candidates.

"Although this creates by far the largest and most technologically advanced fleet, we believe the merger will avoid antitrust concerns because offshore drilling is still fragmented on a global basis," Shoemaker said in a research note.

Under terms of the deal, Transocean shareholders will receive $33.03 cash and 0.6996 shares of the combined company for each share of Transocean they own. Shareholders of GlobalSantaFe will receive $22.46 cash and 0.4757 shares of the new company for each share of GlobalSantaFe they own.

There will be about 318 million shares outstanding of the combined company after the deal is complete. Transocean shareholders will hold roughly 65 percent of the new company while GlobalSantaFe shareholders will hold about 35 percent.

Transocean shares rose $5.99, or 5.4 percent, to $115.96 Monday after briefly rising to a 52-week high of $120.88, while GlobalSantaFe shares rose $3.59, or 4.8 percent, to $78.33 after reaching a 52-week high of $81.19.

The deal is expected to close by the end of 2007. The combined company expects to have about $17 billion in debt at closing, and it intends to dedicate the first two years of free cash flow to reducing debt. The companies said they expect total debt to be less than $10 billion by the end of 2009.