ESV acquires ATW to create an undervalued rig behemoth

In line with our expectations expressed in our initiation of Ensco (BUY, TP 17), the company takes on the role as consolidator in the current trough. Today, ESV announced the acquisition of Atwood Oceanics (BUY, TP 19) in an all-share deal that values ATW at a 33% premium to last close and leaves ATW shareholders with around 31% of the NewCo. Although we believe the offer to be a bit fresh at an EV/EBITDA ‘17E of 8.3x (vs peers at 7.0x), P/NAV of 1.18 and EV/GAV of 1.05, we see a good fit between the fleets and organizational synergies. Overall, we believe the offer is most beneficial for Atwood’s shareholders, but also expect valuation release for Ensco shareholders as the USD 10.72/sh acquisition price is far below our USD 19/sh pre-deal target price for Atwood. We estimate a pro-forma fair value USD 14.2/sh and reiterate our BUY recommendation.

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Sector read-across: After Borr Drilling’s latest acquisition of Transocean’s fleet of jackups and some other smaller transactions, we definitely see the increased M&A and S&P activity as positive and a confirmation that key market participants share our view that a recovery is closing in. Recent data also points to an increased demand for rigs, lending further support to our positive view on future rig fundamentals.

Deal highlights:

  • “Atwood shareholders will receive 1.60 shares of Ensco for each share of Atwood common stock for a total value of $10.72 per Atwood share based on Ensco’s closing share price of $6.70 on 26 May 2017. This represents a premium of approximately 33% to Atwood’s closing price on the same date”
  • “Ensco and Atwood shareholders will own approximately 69% and 31%, respectively, of the outstanding shares of Ensco”
  • “There are no financing conditions for this transaction”
  • “Ensco expects to realize annual pre-tax expense synergies of approximately $65 million for full year 2019 and beyond. The combination is expected to be accretive on a discounted cash flow basis”
  • “The balance sheet of the combined company will remain strong. Adjusted for the expected retirement of Atwood’s outstanding revolving credit facility with cash and short-term investments on hand, total available liquidity was $3.9 billion on 31 March 2017 and included $1.6 billion of cash and short-term investments”
  • “The combined company will have a fleet of 63 rigs, comprised of ultra-deepwater drillships, versatile deep- and mid-water semisubmersibles and shallow-water jackups, along with a diverse customer base of 27 national oil companies, supermajors and independents.”

http://www.enscoplc.com/news-and-media/press-releases/press-release-details/2017/Ensco-plc-to-Acquire-Atwood-Oceanics-Inc/default.aspx

http://ir.atwd.com/file/Index?KeyFile=2000800211

Disclaimer: The publisher currently owns shares in Ensco
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