NEW YORK/SAN FRANCISCO (Reuters) - Ensco Plc (ESV.N) plans to buy Pride International Inc PDE.N for about $7.3 billion to create the world’s second-largest offshore oil and gas driller and extend its reach to lucrative deepwater fields off Brazil and West Africa.
The deal, unveiled on Monday, sets a purchase price for Pride of $41.60 per share, a premium of 21 percent to Friday’s close, and will give Ensco more cash flow to build the high-tech rigs needed to meet oil companies’ demand for equipment capable of drilling in increasingly tough waters.
“Pride and Ensco combined are going to be in all the major oil-producing regions now,” said Kurt Hallead, co-head of energy research at RBC Capital Markets in Austin, Texas.
The industry has been hit hard by the deepwater drilling moratorium in the Gulf of Mexico and stringent shallow-water regulations following last year’s BP Plc (BP.L) well blowout, which led to the worst-ever U.S. maritime oil spill.
With a total of 74 rigs, including six being built, the combined Ensco/Pride will eclipse Noble Corp (NE.N) to be second only to Transocean Ltd RIGN.VX, which has 136 rigs.
London-based Ensco has rigs deployed in the U.S. Gulf, Europe, the Middle East and Asia, and the deal will add Pride’s five rigs off Africa’s west coast and nine off Brazil.
Ensco did not have rigs in South America before it agreed to move an idle rig in the Gulf of Mexico to French Guiana in December. Then just last week, it struck a deal to move a rig to Brazil from Australia.
State oil company Petrobras (PETR4.SA) plans to invest $224 billion between 2010 and 2014 to tap into billions of barrels of oil from ultra-deepwater fields off Brazil, with $119 billion of that going toward exploration and production.
That will require dozens of deepwater drilling rigs that can operate in water depths of 10,000 feet; and while Petrobras has said it plans to build many of its own rigs, drilling contractors hope to win a substantial share of that market.
Pride and Ensco have a total of 21 deepwater rigs available or being built, equal to Noble but behind Transocean’s 44, giving it a strong position in the most lucrative market segment, which often pays rig owners more than $500,000 a day.
Ensco said rig construction would absorb much of the new company’s cash flow in the next few years. Combined, they have added 12 new vessels in the past few years, and would have the second-youngest deepwater fleet, after Seadrill Ltd (SDRL.OL).
Seadrill, an acquisitive Norway-listed company, had long been seen as Pride’s natural buyer, since it owns nearly 10 percent of Pride’s shares. Seadrill Chief Financial Officer Esa Ikaheimonen told Reuters the Ensco offer looked like a “decent number” and said the deal would be positive for the sector.
Drillers will buy more rigs in the coming years as they try to challenge Transocean, which bought GlobalSantaFe for about $15 billion in 2007, but experts said buying drilling companies is tough and that Pride was a special target.
The deal is like to draw antitrust scrutiny in the United States, Britain and perhaps Brazil, because of the importance of the energy sector and the size of the transaction. But it is unlikely to be blocked, said Bruce McDonald, a former U.S. deputy assistant attorney general, who is now with law firm Jones Day.
“Based on what they say about their fleet profiles and geographic strengths, it does seem like they’re more complementary,” he said. “I don’t have reason to think that any of the agencies would block them.”
Pride and Ensco’s combined company, which would be based in Britain, will seek annual cost savings of $50 million by 2012, and the deal should add to Ensco’s earnings in 2011 and 2012.
Pride shareholders would receive 0.4778 newly issued Ensco share plus $15.60 cash for each Pride share. The deal would be financed through a combination of existing cash on the balance sheet and newly issued Ensco shares and debt. Total cash paid to Pride shareholders would be about $2.8 billion.
Ensco has commitments from Deutsche Bank and Citibank to finance the incremental debt required for the deal. Ensco’s lead adviser was Deutsche, while Citi also served as financial adviser and Baker & McKenzie LLP acted as its legal adviser.
Pride’s outstanding bonds rose, since Ensco’s offer involves the assumption of $1.9 billion of its debt.
Pride’s most actively traded bonds, its 6.875 percent senior notes due August 2020, climbed 4.5 points to a high of 114.25, versus 109.75 on Friday, according to Thomson Reuters Tradeweb. The bonds later fell back to 112.75.
CDS of Pride tightened 60 basis points to 108.25 before easing to 119.0.
Houston-based Pride was advised by Goldman Sachs and its legal advisers are Baker Botts LLP and Wachtell, Lipton, Rosen & Katz.
Pride shares rose 15.7 percent to $39.80 on the New York Stock Exchange, while Ensco ended 4.2 percent lower at $51.13.
Additional reporting by Michael Erman, Brian Ellsworth in Rio de Janiero; Diane Bartz in Washington, and IFR analyst Rachelle Horn; Editing by Gerald E. McCormick, Steve Orlofsky and Matthew Lewis