Hercules Offshore to acquire Todco for $ 2.3 bn

Hercules Offshore, the US oil and gas driller that doubled its sales last year, agreed to buy rival Todco for about $ 2.3 bn, betting on a rebound in rents for rigs used in the shallow waters of the Gulf of Mexico.
Todco stockholders will get $ 16 in cash and 0.979 share of Hercules for each of their shares, the Houston-based companies said. The deal values Todco at $ 42.01 a share, 28 % higher than its March 16 closing price.

Hercules Chief Executive Officer Randall Stilley will more than triple his fleet of so-called jackup rigs, designed to drill in less than 250 feet of water. Rents for such rigs peaked at $ 120,000 a day about a year ago and have fallen to $ 70,000 to $ 75,000 on a decline in US natural-gas prices.
“The expectation of day rates for those types of rigs in the Gulf of Mexico is a little questionable, which is one reason the transaction got some raised eyebrows,” said James Wicklund, chief investment officer at Spinnerhawk Capital Management, a Dallas hedge fund that oversees $ 30 mm in energy commodities and stocks. The acquisition won't add to per-share profit until 2008 at soonest, he said.

Todco is twice as big as Hercules and gets about 28 % of its sales outside the US Hercules, taken public in 2005 by buyout firm Greenhill Capital Partners, gets only 14 % of its sales outside the US.
“It's not exactly the flea swallowing the elephant, but it's a smaller company buying a larger company,” said Wicklund, who joined Spinnerhawk in February after working as an analyst at Bank of America Corp.
Hercules expects rig rents to “improve moderately” in 2008, Stilley told. “It's not to the height of 2006, but there will be some improvement.”

Gas prices touched an all-time high of $ 15.78 per mm Btu in December 2005, based on New York Mercantile Exchange futures, and they have fallen by more than half since then. Rates for jackups, so called because they rest on retractable legs that extend to the seafloor, peaked in the first half of 2006, according to Dan Pickering of consulting firm Pickering Energy Partners in Houston.
“Gas prices are OK but not great, which means that day- rates are probably stable at a relatively low levels compared to their recent peaks,” Pickering said.

Break-up fees
Stilley and his management team will run the combined company. Todco shareholders will own 64 % of Hercules Offshore's stock, the companies said. The deal has break-up fees of $ 30 mm for Hercules and $ 70 mm for Todco.
The combined company will have more than 3,900 employees, 33 jackup rigs, 27 barge rigs, 64 lift boats, three submersible rigs, nine land rigs and one platform rig. It will operate in 10 countries on five continents.

Niche-market oriented
Hercules will use cash on hand and a secured term loan underwritten by UBS Investment Bank to fund the acquisition, which the companies expect to close in mid-2007. UBS and Simmons & Co. International advised Hercules on the transaction, and Citigroup advised Todco.
“Both of those companies have rigs that are very niche-market oriented toward the Gulf of Mexico, and so putting those fleets together actually makes good sense,” said Tom Marsh, US publisher for ODS-Petrodata, which tracks rig rates. “It's probably not that big of a gamble.”

Todco, previously known as R&B Falcon, was acquired by Transocean in 2001. Transocean, the world's largest offshore drilling contractor, separated from Todco by selling its shares of the former subsidiary to the public in a series of sales that began in 2004.
Transocean, GlobalSantaFe and Noble, all based in or near Houston, are the largest offshore drillers and will rank ahead of Hercules after the Todco deal. Hercules said it will have the world's fourth-largest fleet of jackup rigs.