Schlumberger pays Smith $11 for its “breakthrough” engineered drilling systems
Oilfield services giant Schlumberger Ltd. plans to acquire Smith International Inc. in an $11 billion stock transaction.
Transaction details
Under the terms of the agreement, Smith shareholders will receive 0.6966 shares of Schlumberger in exchange for each Smith share. Based upon the undisturbed closing stock prices for both companies on February 18, 2010, the agreement places a value of $45.84 per Smith share, representing a 37.5% premium. Upon closing, Smith stockholders will own nearly 12.8% of Schlumberger’s outstanding shares of common stock.
According to Doug Sheridan at EnergyPoint Research Inc., the deal values Smith at $10.6 billion–a “hefty acquisition price, equating to a premium of 37.5% over Smith’s most recent closing share price and 114.0% above Smith’s share price just one year ago.”
Schlumberger expects to realize incremental pretax synergies—after integration costs—of roughly $160 million in 2011 and near $320 million in 2012.
With over 77,000 employees, Schlumberger posted 2009 revenues of $22.7 billion, and is valued at roughly $76 billion–over twice the size of its competitor Halliburton. The oilfield services giant employs 77,000 people and now gains access to Smith’s 21,000 employs, 2009 revenues of $8.2 billion, and access to contracts such as the one PathFinder, the operating unit of Smith International, recently signed with Petrobras.
M-I SWACO
The transaction also gives Schlumberger control of M-I SWACO, a joint venture owned 60% by Smith International and 40% by Schlumberger. Upon closing, which is expected in the latter half of 2010, Schlumberger will control the large drilling fluids services provider and its estimated 13,000 employees in over 400 service locations around the world.
M-I SWACO ranked number one overall in customer satisfaction in EnergyPoint’s latest oilfield customer satisfaction survey, and placed first in numerous global regions, as well as in offshore, high-pressure high temperature (HPHT) and non-vertical applications.
“Although Schlumberger might be tempted to roll M-I SWACO into its own organization, given M-I SWACO’s strong standing with customers and excellent operating culture, the best move for Schlumberger and customers might be to simply leave M-I SWACO as a separate unit,” noted Sheridan.
Strategy and implications
A large part of the strategy for Schlumberger is the considerable value it sees in Smith’s drill bits business, particularly Smith’s IDEAS (Integrated Dynamic Engineering Analysis System) and i-DRILL technologies.
Andrew Gould, chairman and CEO of Schlumberger referred to these systems as the next “breakthrough,” noting increased levels of drilling are required to sustain and increase world oil and gas production and that those wells will be “drilled in more challenging environments and in new resource plays, with longer and more complex profiles.”
These “engineered drilling systems that optimize all the components of the drillstring” allow customers to drill more economically in demanding conditions, he continued.
There are a few elements to watch in the coming weeks and months as the transaction comes together before its anticipated second-half 2010 expected closing date.
First, the combination of two large entities such as these is sure to catch the eye of antitrust regulators; thus some analysts believe certain assets will be sold.
Second is the handling of Smith products and services by Schlumberger. Sheridan and EnergyPoint are weary of such mergers and the implications for customers. “We’ve seen too many ratings and read too many accounts from customers that indicate the existing culture, personal relationships and product and service quality of highly rated suppliers (like Smith) are not duly appreciated, and therefore not maintained, buy purchasers with lower overall customer satisfaction ratings.”
Justifying the deal financially often comes with cost cuts and price hikes, Sheridan continued. “Unfortunately, this transaction’s large purchase premium, targeted cost savings of $310 million by 2012, and Schlumberger’s reputation for aggressive pricing all cause us to believe the deal will potentially result in a degradation of the Smith experience many customers have come to appreciate,” he concluded.
Goldman, Sachs & Co. acted as financial advisor and Baker Botts LLP served as legal counsel to Schlumberger. UBS Investment Bank acted as financial advisor and Wachtell, Lipton, Rosen & Katz served as legal counsel to Smith International.