Oil and gas drilling rig company Hercules Offshore Inc said on Monday it agreed to buy larger peer TODCO for $2.3 billion in cash and stock, giving it a stronger position in the Gulf of Mexico. Houston-based Hercules said TODCO shareholders will receive 0.979 Hercules share and $16 cash for each of their shares.
The deal values TODCO at $42.01 per share, based on Friday's closing price for Hercules shares, for a 28 percent premium over TODCO's Friday close. The combined company would control the world's fourth- largest fleet of jackup rigs, which are used to drill in shallow waters.
Based on the take-over price, the combined company would trade at about nine times forecast 2007 earnings, in line with the 9.2 P/E ratio for the broader drilling sector, but a premium to the 6 P/E Hercules currently trades at and the 7.1 P/E ratio for TODCO.
The deal "makes tons of strategic sense," analysts at Pickering Energy Partners said in a note to investors, with a "take-the-money-and-run" price for TODCO investors.
TODCO shares were up nearly 18 percent at $38.63 in afternoon trading on the New York Stock Exchange, while Hercules shares fell 8 percent to $24.35 on Nasdaq.
"The kicker we think in the deal is the cash flow and free cash flow in TODCO," said Roger Read, an analyst with Natexis Bleichroeder in Houston.
TODCO finished 2006 with about $180 million in cash on hand, Read said, and that figure is expected to rise to about $300 million by mid-2007, when the deal is expected to close.
"That reduces the purchase price to about $37 (per share) from $42," Read said.
Oil services sector companies, whose coffers have been boosted by a three-year boom in spending on oil and gas development by energy producers, are widely expected to enter a period of consolidation.
Hercules said the link up would enable the company to further expand through acquisitions, including buying assets put on the market by other drillers.
"We would like to be in a position to take advantage of that," Hercules Chief Executive and President Randall Stilley told a conference call.
The new company will have a fleet of 33 jackup rigs, 28 barge rigs, 64 liftboats, three submersible rigs, nine land rigs and one platform rig.
On completion, TODCO shareholders will own about 64 percent and Hercules Offshore shareholders will own about 36 percent of the combined company.
Hercules said it would fund the deal through cash on hand and a senior secured term loan facility that has been underwritten by UBS Investment Bank.
UBS was the lead financial advisor, while Simmons & Co International and Citigroup Corporate also advised on the deal.
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