Schlumberger Ltd., the world's biggest oilfield services company, has agreed to purchase fellow industry player Smith International Inc. for about $11 billion in stock in a move to diversify its product offerings and better compete with rival Halliburton Co.
The deal, announced Sunday, boosts Schlumberger's portfolio just as business is beginning to recover. Smith, based in Houston, makes drilling tools, bits and other products for the oil and gas industries.
Schlumberger, which has main offices in Paris, Houston and The Hague, Netherlands, slumped during the global recession that weakened energy demand and discouraged drilling operations around the world. But prices have since rebounded, and the company said in its most recent earnings report in January that its business will benefit as recovering countries burn more fuel.
Under terms of the transaction, Smith stockholders will receive 0.6966 of a Schlumberger share for each share held. Based on Schlumberger's closing stock price Friday of $63.90, that values Smith shares at $44.51 each. Based on Smith's 247.4 million shares outstanding, the all-stock purchase is worth $11.01 billion.
The deal values Smith shares at a 25 percent premium to their closing price Thursday before reports of the companies' merger talks sent Smith's shares soaring. Smith CEO John Yearwood said the acquisition, which has been unanimously approved by both companies' boards, is good for shareholders.
BMO Capital Markets analyst Alan Laws has said the purchase would fill in the few gaps Schlumberger has in its portfolio by adding Smith's leading positions in fluids and drill bit technology. In a note to clients Friday as speculation about a possible deal swirled, Laws said the acquisition would beef up Schlumberger's domestic U.S. operations with "mainstream services that are in high demand." He expects Smith's Wilson distribution business will be spun out after the deal closes.
Also Friday, Deutsche Bank Securities analyst Mike Urban noted that Schlumberger already owns 40 percent of Smith's drilling fluids business, M-I Swaco. Full ownership of M-I Swaco would fit with Schlumberger's goal of being the first or second biggest player in its businesses.
Schlumberger reported profits of just over $3 billion on $22.7 billion in revenue in 2009. Smith is less than half its size but still a significant player, earning about $1 billion on revenue of $8.2 billion last year. The company employs more than 21,000 workers worldwide.
Because of overlaps in the two companies' businesses, Schlumberger said it expects to see pretax savings of about $160 million in 2011 and $320 million in 2012. Earnings per share are expected to benefit starting in 2012.
Schlumberger Chairman and CEO Andrew Gould said increased levels of drilling will be required to sustain world oil and gas production. Oil companies will be challenged to drill both more economically and in more difficult, hard to reach areas. Gould said the Smith deal allows the company to merge its expertise in measurement and steering capabilities with Smith's drilling fluid and bit technologies.
Smith shareholders will own about 13 percent of the combined company once the deal is completed, likely in the second half of 2010.
The acquisition comes six months after Schlumberger rival Baker Hughes Inc. struck a $5.5 billion cash-and-stock deal to buy BJ Services Co. — a move analysts saw as likely to touch off further consolidation in the oilfield services sector.
Capital One Southcoast Inc. analyst Pierre Conner said Friday that a deal between the companies would face a lot of scrutiny from antitrust regulators. The Justice Department has issued multiple requests for information on the Baker Hughes/BJ Services deal, which is expected to close sometime in the first quarter.
Goldman, Sachs & Co. and Baker Botts LLP served as financial and legal advisers, respectively, to Schlumberger. UBS Investment Bank and Wachtell, Lipton, Rosen & Katz advised Smith International.