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Offshore drillers Ensco, Rowan to combine to create company worth $12B


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Offshore drillers Ensco, Rowan to combine to create company worth $12B

U.K.-based Ensco PLC and Houston-based Rowan Cos. PLC jointly announced Oct. 8 that the two offshore drilling service companies have agreed to merge in an all-stock transaction that company executives expect will bring $150 million in cost savings amid an oil market recovery.

Based on Ensco's Oct. 5 closing price on the New York Stock Exchange of US$8.48 and Rowan's of $18.78, the combined entity has an enterprise value of $12 billion.

Following the deal's announcement, shares of both companies were up approximately 2.2% on the day during Oct. 8 midmorning trading.

Through the transaction, the companies said Ensco's shareholders will benefit from Rowan's joint venture with Saudi Arabian Oil Co., ARO Drilling, while all shareholders should benefit from expected annual pretax expense synergies of approximately $150 million, of which more than 75% are expected to be achieved within 12 months of the deal's expected closing during the first half of 2019. Company executives expect shareholders will see increased cashflow per share in 2020.

The companies expect the cost savings to come from corporate and regional overlaps, supply chain efficiencies and the standardization of systems, policies and procedures across the combined organization.

Excluding ARO Drilling's unconsolidated backlog, the combined entity's backlog is $2.7 billion. Executives expect the combined entity to have liquidity of approximately $3.9 billion, of which $1.9 billion will consist of cash and short-term investments.

Under the terms of the agreement, Rowan shareholders will receive 2.215 Ensco shares for each Rowan share. Upon closing, Ensco and Rowan shareholders will own approximately 60.5% and 39.5%, respectively, of the outstanding shares of the combined company.

Excluding ARO Drilling, the combined company: will possess a fleet of 82 rigs, including 28 floaters and 54 jack-ups, which can raise their hulls above the surface of the water and are capable of drilling in waters up to 350 feet deep; will serve more than 35 customers, including the largest national oil companies, international majors and independent exploration and production companies; and will operate in nearly every major deep- and shallow-water basin offshore six continents.

The combined company is expected to leverage ARO Drilling's 20-rig new build program "to develop and deploy leading-edge technology at scale."

"Simply put, this is a beautiful combination from a strategic perspective, as [Rowan] gains immediate scale and breadth in the ultra-deepwater market (while adding a significant contract backlog), and [Ensco] immediately regains its position as the top global jackup player with the addition of [Rowan's] high-specification jackup fleet," Tudor Pickering Holt & Co. analysts wrote in an Oct. 8 note. "Furthermore, [Ensco] will now gain exposure to the ultra-harsh jackup market (particularly in Norway), which is a market that is quickly beginning to tighten, and double-down on its already robust market share position ... via [Rowan's ARO drilling joint venture] (which will be a significant growth engine moving forward)."

However, the analysts noted their concern about an absence of an equity premium for Rowan's shareholders.

Rowan President and CEO Tom Burke will serve in the same role at the newly combined company, while Ensco President and CEO Carl Trowell will serve as executive chairman. Jon Baksht, senior vice president and CFO of Ensco since November 2015, will serve in the same role at the combined company.

The combined company's board will be comprised of Trowell and Burke, plus five additional members from Ensco's current board and four additional members from Rowan's current board.

The company will name other executives at a future date.

Both companies have offices in the U.K. and Houston, and the combined companies will maintain executive offices in both locations.

Morgan Stanley & Co. LLC acted as lead financial adviser to Ensco, while HSBC Securities (USA) Inc. and Citigroup Global Markets Inc. also acted as financial advisers to Ensco. Gibson, Dunn and Crutcher LLP and Slaughter and May acted as financial advisers to Ensco.

To Rowan, Goldman Sachs & Co. LLC acted as financial adviser, while Kirkland & Ellis LLP and Latham & Watkins LLP acted as legal advisers.