Reflecting Further On Transocean’s Acquisition Of Songa Offshore – Seeking Alpha

Note:

I have covered Transocean (NYSE:RIG) previously, so investors should view this article as an update to my earlier publishings on the company.

Yesterday, I discussed the implications of Transocean's proposed acquisition of Norway-based Songa Offshore in detail and in conclusion took a neutral stance towards the transaction as positive and negative aspects seemed to be roughly in balance.

Photo: All four CAT-D rigs at the time of their construction at DSME shipyard in South Korea

After further digesting the details of the deal and management's statements on yesterday's conference call, I am changing my view to "negative".

My new assessment is based on the following issues:

That said, the transaction's biggest risks obviously center around Statoil's attitude towards the deal. If the CAT-D contracts aren't as bullet proof to the upcoming change of control as asserted by Transocean's management, the acquisition will end up as an unmitigated disaster and undoubtedly cause the removal of Transocean's senior management, a move that has been overdue anyway for some time given that a less indecisive course of action over the course of the ongoing downturn would have already saved the company hundreds of millions of dollars.

With the sole reasoning for the deal centering around the future cash-flows of the CAT-D contracts, it seems almost mind-blowing that Transocean deliberately abstained from discussing its plans with Statoil in advance.

Consequently, Statoil won't be exactly thrilled by Transocean's almost reckless course of action. In fact, I would expect Statoil to undertake every effort to alter the contract terms in their favor as a result of the acquisition. Keep in mind, Statoil hasn't hesitated to take advantage of existing contract terms in the past.

In sum, the deal looks like another bold example for Transocean management's limited credibility as well as its ongoing lack of financial and strategic vision.

Should the upcoming change of control and management's failure to discuss the implications of the proposed transaction with Songa's sole customer in advance, result in Statoil managing to alter the contract terms in its favor, the acquisition could end up as an unmitigated disaster for Transocean, hopefully leading to the long overdue removal of the company's senior management, particularly Transocean's CEO Jeremy Thigpen.

Lastly, the resulting dilution removes a good chunk from the stock's potential upside in case of an industry recovery.

Market's initial take of the transaction has been decidedly negative with Transocean's shares briefly touching new all time lows in yesterday's trading before recovering somewhat.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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Reflecting Further On Transocean's Acquisition Of Songa Offshore - Seeking Alpha