Oilfield services giant Schlumberger Ltd. (NYSE: SLB) has reached a definitive merger agreement with Cameron International (NYSE: CAM) in which the companies will combine in a stock and cash transaction to create a "pore-to-pipeline" company offering complete integration between downhole and surface technologies. On a pro forma basis, the combined company had 2014 revenues of $59 billion.
Given the companies' current OneSubsea joint venture, the rationale behind the move into subsea equipment makes sense, Oppenheimer analysts said. "As an OFS behemoth, we think this is a natural progression for SLB. It combines SLB's subsurface and wellbore expertise with the No. 2 player in a growing subsea equipment market."
Global Hunter Securities analysts said a transformation by Schlumberger into a dual manufacturing and service company "is still somewhat of a surprise," noting that, with the exception of a few business lines, "SLB has generally been a service and technology-oriented company and has not shown interest in "making things" in the past."
However, while the deal "may increase execution risk and might lower its multiple profile," Global Hunter Securities analysts continued, "we see SLB as one of the few companies that could tackle the challenges and successfully create a formidable technology force in the oilfield from the combination."
"This agreement with Cameron opens new and broader opportunities for Schlumberger," said Paal Kibsgaard, chairman and CEO of Schlumberger. "With oil prices now at lower levels, oilfield services companies that deliver innovative technology and greater integration while improving efficiency, which our customers increasingly demand, will outperform the market," he continued.
"We believe that the next industry technical breakthrough will be achieved through integration of Schlumberger's reservoir and well technologies with Cameron's leadership in surface, drilling, processing and flow control technologies. Deep reservoir knowledge further enabled by instrumentation, software and automation, will launch a new era of complete drilling and production system performance," Kibsgaard said.
Jack Moore, chairman and CEO of Cameron, added, "This exciting transaction builds on our successful partnership with Schlumberger on OneSubsea and will position Cameron for its next phase of growth."
Under the terms of the agreement, Cameron shareholders will receive 0.716 shares of Schlumberger common stock and a cash payment of $14.44 in exchange for each Cameron share.
Based on the closing stock prices of both companies on August 25, 2015, the agreement places a value of $66.36 per Cameron share, representing a 37.0% premium to Cameron's 20-day volume weighted average price of $48.45 per share, and a 56.3% premium to Cameron’s most recent closing stock price of $42.47 per share.
"We believe this is clearly a positive for CAM given the high 56.3% share price premium and the 78.2% stock consideration that will allow it to share in any upside of an improving market cycle," Global Hunter Securities analysts noted.
Early market activity Wednesday saw shares of Cameron trading up 42.5%.
The price represents a 2016 EV/EBITDA multiple of 10.8x on Global Hunter Securities' EBITDA estimate, "in line with typical manufacturing mergers over the last decade although well below some of the recent reference points, including LUFK-GE and DRC-SI," they noted.
Upon closing, Cameron shareholders will own approximately 10% of Schlumberger's outstanding shares of common stock. Schlumberger expects to realize pretax synergies of approximately $300 million and $600 million in the first and second year, respectively, with the combination expected to be accretive to earnings per share by the end of the first year after closing.
Goldman, Sachs & Co. is acting as financial advisor, and Baker Botts LLP and Gibson Dunn & Crutcher LLP are serving as legal counsel, to Schlumberger. Credit Suisse is acting as financial advisor and Cravath, Swaine & Moore LLP is serving as legal counsel to Cameron.
The agreement was unanimously approved by the boards of directors of both companies, but is still subject to Cameron shareholders' approval, regulatory approvals and other customary closing conditions. In terms of antitrust, said Oppenheimer analysts, there is "not much in the way of overlapping businesses, and therefore, we do not envision an overly difficult antitrust review." Schlumberger expects the deal to close in the first quarter of 2016.
The deal may be "a major step in what is undoubtedly going to be a significant industry consolidation," said Cowen and Company analysts.
Going forward, Cowen analysts expect "heightened discussions of further M&A – particularly among offshore subsea equipment suppliers FMC Technologies, Aker Solutions, Oil States, and DrilQuip. Other sectors will undoubtedly consolidate as well, given the severity of the industry downturn."