Transocean Ltd. and Ocean Rig UDW Inc. have entered into a definitive merger agreement under which Transocean will acquire Ocean Rig in a cash and stock transaction valued at about $2.7 billion, inclusive of Ocean Rig’s net debt.

The transaction consideration is comprised of 1.6128 newly issued shares of Transocean plus $12.75 in cash for each share of Ocean Rig’s common stock, for a total implied value of $32.28 per Ocean Rig share, based on the closing price on Aug. 31, 2018. This represents a 20.4% premium to Ocean Rig’s 10-day volume weighted average share price.

Transocean intends to fund the cash portion of the transaction consideration through a combination of cash on hand and fully committed financing provided by Citi.

The transaction has been unanimously approved by the board of directors of each company. The transaction, which is expected to be completed during 1Q 2019, is subject to the approval of both Transocean and Ocean Rig shareholders and the satisfaction of customary closing conditions, including applicable regulatory approvals. The merger is not subject to any financing condition.

Upon completion of the merger, Transocean’s and Ocean Rig’s shareholders will own about 79% and 21%, respectively, of the combined company.

Ocean Rig’s fleet is comprised of nine high-specification ultra-deepwater drillships and two harsh environment semisubmersibles. Additionally, its fleet includes two high-specification ultra-deepwater drillships currently under construction at Samsung Heavy Industries with favorable shipyard financing terms. These two newbuilds are expected to be delivered in 3Q 2019 and 3Q 2020, respectively.

Jeremy Thigpen, Transocean’s president and CEO, said: “The proposed acquisition of Ocean Rig provides us with a unique opportunity to continue enhancing our fleet of ultra-deepwater and harsh environment floaters, without compromising our liquidity or overall balance sheet flexibility.

“The combination of constructive and stable oil prices over the last several quarters, streamlined offshore project costs, and undeniable reserve replacement challenges has driven a material increase in offshore contracting activity. As such, adding Ocean Rig’s premium assets to our industry-leading fleet provides us with an increased number of the modern and highly efficient ultra-deepwater drillships preferred by our customers, and better positions us to capitalize on what, we believe, is an imminent recovery in the ultra-deepwater market.”

Thigpen continued: “This combination with Ocean Rig further strengthens our relationships with strategic customers, while expanding our presence in the key markets of Brazil, West Africa, and Norway. It also enables us to reduce our cost per active rig, as we believe that we can efficiently merge the Ocean Rig operations into our existing structure with limited incremental shore-based expense. Further, we are confident that we can realize meaningful synergies through our OEM agreements, our overall approach to maintenance and our fleet-wide insurance coverage, among other opportunities.”

He concluded: “Including the five rigs under construction and considering the two additional rigs that we have recently decided to recycle, Transocean’s pro forma fleet will be comprised of 57 floaters, including many of the most technically capable ultra-deepwater floaters, and harsh environment semisubmersibles in the industry. With this unparalleled fleet, the offshore drilling industry’s largest and most profitable backlog totaling $12.5 billion, and approximately $3.7 billion in liquidity, we are well-equipped for the market recovery.”

Pankaj Khanna, president and CEO of Ocean Rig UDW Inc., said: “This strategic combination of Ocean Rig and Transocean creates a world-class fleet perfectly positioned for the market recovery while reducing fragmentation that currently exists in offshore drilling. By adding our high-specification floaters to Transocean’s industry-leading fleet, the combined company will have the offshore industry’s largest and most technically capable fleet of ultra-deepwater and harsh environment floaters. Upon consummation, this transaction will be of significant benefit to the stakeholders of both companies.”

In addition, Transocean said it will retire the ultra-deepwater drillship C.R. Luigs and the midwater floater Songa Delta. The rigs will be classified as held for sale and will be recycled in an environmentally responsible manner. Both floaters are currently stacked.

Leslie Cook, principal analyst, upstream supply chain, at Wood Mackenzie, said: “The purchase of Ocean Rig is in line with Transocean’s strategy to have the number one fleet of premium ultra-deepwater and harsh environment rigs.

“The announcement is not a surprise. Industry consolidation is necessary to get these premium assets back to work over the next two to three years. The Ocean Rig fleet aligns very well with Transocean’s best-in-class portfolio.”        

She added: “It is Wood Mackenzie’s view that the premium ultra-deepwater drillship market has reached the bottom and rates for some of the highest-spec assets have the potential to double in the next couple years as active utilization begins to tighten.

“Operators are already demonstrating a preference for newer rigs that offer greater efficiency in their drilling programs.”

Cook said: “As rates begin to float back up, the need to keep drilling costs down will drive demand for these newer rigs that can offer efficiency gains. By buying Ocean Rig, Transocean is positioning itself to offer the industry premium rigs at competitive day rates. This is a winning deal – for Transocean, for Ocean Rig, and for the industry.”