Transocean, GlobalSantaFe in merger deal

NEW YORK (Reuters) - Transocean Inc. (RIG.N), the world's largest offshore driller, said on Monday it would buy GlobalSantaFe Corp. GSF.N for nearly $18 billion, adding shallow-water drilling rigs to its deepwater fleet.

The deal, which offers no premium GlobalSantaFe shareholders, includes stock, as well as pay-out to shareholders of both companies totaling $15 billion.

The combination would expand the companies' global reach by creating a fleet of nearly 150 rigs with a market-leading role in the lucrative deepwater drilling business and a large presence in jack-up rigs that are in much demand from national oil companies seeking to develop shallow water fields.

The move by the two largest drillers by market valuation comes after months of speculation that the sector would consolidate to take advantage of the huge spending increases by oil producers, particularly for the development of offshore fields.

But bullish fundamentals and merger hopes drove stocks to record highs, making potential deals too expensive.

In order to get around those lofty prices, the companies have agreed to a stock deal, while also leveraging their combined $33 billion in contracted orders to borrow $15 billion that it will pay out to shareholders of both companies as a dividend.

"This is the type of transaction shareholders have been clamoring for," said Mark Urness, an analyst with Calyon Securities.

"They have managed to dividend-out a portion of their backlogs," Urness said.

News of the deal sent shares of Transocean up about 5.7 percent or $6.2739 to $116.24 while GlobalSantaFe shares followed along, gaining about 5.2 percent or $3.92 to $78.66.

"(The deal) highlights that there's a lot of value to be extracted," said Jerry Jordan, president and portfolio manager for Helman, Jordan Management, which has $500 million under management.

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The deal could help open up the sector for other mergers or acquisitions as drilling and service companies seek to expand into the booming offshore segment.

"In terms of the impact on the industry, this may usher in more M&A activity in the space in order to prevent a single company from dominating," Bear Stearns analysts wrote in a note to investors.

Others in the sector that could eyed for future deals are Noble Corp (NE.N), Diamond Offshore (DO.N), Pride International (PDE.N), Rowan Co. (RDC.N) Hercules Offshore (HERO.O) and Ensco International (ESV.N).

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

The deal structure -- adding a leveraged recapitalization that is paid out as a cash dividend to a no-premium stock-for-stock deal -- may work for other companies that have cash on hand, steady cash flow and low debt, one source familiar with the situation said.

Other sector shares were helped by the move, with the S&P Oil & Gas Drilling Sub-Industry index .GSPOILD up 4.3 percent.

The combined company in the Transocean-GlobalSantaFe deal would use its first two years of free cash flow to reduce debt. During a conference call, the companies said they expect less than $10 billion in debt by the end of 2009.

The companies said in a statement that the $15 billion bridge loan will be due one year after closing. Transocean said it expects to refinance the loan with a mix of bank loans and debt securities.

The combined company, which would be known as Transocean Inc., would have a global fleet of 146 rigs. The company would have offices in Houston and trade on the New York Stock Exchange under Transocean's current symbol "RIG" (RIG.N).

Transocean's 82 rigs are focused mostly on the deepest oil and gas drilling projects, which have seen day-rates jump to more than $500,000 in recent years, while GlobalSanteFe's fleet is heavy on jack-up rigs used in shallower waters.

Transocean Chief Executive Robert Long would continue in that role after the merger, while GlobalSantaFe President and CEO Jon Marshall would serve as Transocean's president and chief operating officer. GlobalSantaFe Chairman Robert Rose will become chairman.

Both companies would have equal representation on 14-member board, chaired by GlobalSantaFe's Chairman Robert Rose.

The companies expect the deal to close by the end of 2007.

Transocean was advised by Goldman Sachs while Lehman Brothers advised GlobalSantaFe. Goldman and Lehman are providing the financing for the recapitalization.

(Additional reporting by Jessica Hall in Philadelphia)