LOS ANGELES, Jan. 7, 2019 /PRNewswire/ -- Canyon Capital Advisors LLC (together with certain of its affiliates, "Canyon") is the investment advisor to funds and accounts that hold over 8 million shares, or approximately 6.3%, of the outstanding ordinary shares of Rowan Companies plc ("Rowan" or the "Company") (RDC). On Friday, January 4, 2019, Canyon sent a letter to Rowan's board of directors expressing its intention to vote against Rowan's contemplated merger with Ensco plc for the reasons described therein.
The full text of the letter can be read below:
January 4, 2019
Via Email and FedEx
The Board of Directors
Rowan Companies plc
2800 Post Oak Boulevard
Houston, TX 77056
Re: Proposed Merger With Ensco plc
Members of the Board:
Canyon Capital Advisors LLC (together with certain of its affiliates, "Canyon") is the investment advisor to funds and accounts that hold over 8 million shares, or approximately 6.3%, of the outstanding ordinary shares of Rowan Companies plc ("Rowan" or the "Company"). Founded in 1990, Canyon is a leading alternative asset manager investing on behalf of institutional investors worldwide, with approximately $24 billion in assets under management. We are headquartered in Los Angeles, with offices in Hong Kong, London, New York, Seoul, Shanghai and Tokyo.
As one of the Company's largest shareholders, Canyon has a number of significant concerns regarding the proposed Rowan-Ensco merger and intends to vote against it. Canyon's concerns include the following:
- The proposed merger does not adequately account for disparities in the companies' operational risk profiles, increasing the risk to Rowan and its shareholders by tying the Company's success to Ensco's older fleet of midwater and deepwater offshore drilling rigs and increasing exposure to more volatile segments of the offshore drilling industry.
- The proposed merger does not adequately account for disparities in the companies' financial risk profiles, increasing the risk to Rowan and its shareholders by adding significant balance sheet leverage as a result of Ensco already carrying $5.2 billion in long-term debt, with significantly greater intermediate maturities than Rowan has, and having nearly $400 million less available cash and short-term investments than Rowan.
- The proposed merger consideration whereby Rowan's shareholders will receive 2.215 Ensco shares for each of their Rowan shares is wholly inadequate, representing no premium on the closing price of Rowan's shares the day before the transaction was announced and less than the also entirely inadequate 2.5 share exchange ratio Ensco had offered previously (which still did not fairly reflect Rowan's value). The lack of a premium for Rowan shareholders fails to compensate them for the vastly increased risk that Ensco brings to the combination.
- The proposed merger is the result of a flawed sales process. No comprehensive procedure appears to have been employed to test the market to determine the appropriateness of a sale and the best achievable price. Moreover the merger was approved by a Board of Directors collectively owning less than 1% of Rowan's shares and was negotiated by a CEO whose interests are not fully aligned with Rowan's shareholders'.
- In a number of respects, Rowan's recent presentation of January 3 designed to justify the transaction cherry picks information and does not present a fair picture.
While Canyon generally supports pursuing a strategic transaction to capture synergies and unlock value for Rowan shareholders, it is imperative that any such transaction be done at the right time and the right price, and without jeopardizing Rowan's long-term liquidity and solvency. Given the quality of Rowan's fleet, the strength of its customer base and the health of its balance sheet, Canyon believes Rowan is extremely well-positioned to deliver outstanding results for its shareholders without pursuing risky, dilutive transactions. Accordingly, Canyon will vote against the proposed Rowan-Ensco merger.
Rowan's Assets Are Superior
Canyon believes that the proposed merger with Ensco fails to adequately compensate Rowan's shareholders for the superior quality and risk profile of Rowan's assets as compared to Ensco's older and less reliable asset base and for Ensco's exposure to more volatile segments of the offshore drilling industry. Rowan's fleet is more modern, more stable, more capable and less risky than Ensco's fleet. The historical focus by Rowan on premium jack-ups has left it in a prime position to capitalize on the better near-to-medium term (and less risky) prospects for shallow water drilling assets. In addition, the Company's 50/50 joint venture with Saudi Aramco (the largest user of jack-ups in the world) provides it with substantial assets that have a low likelihood of being disrupted by volatility in the price of oil, giving Rowan's cash flow a higher degree of predictability.
Ensco, on the other hand, has historically focused on and increased its exposure to midwater and deepwater drilling, which have greater risk due to the significantly higher cost of profitably operating those assets and their resulting susceptibility to adverse market developments. Moreover, whereas Rowan's newer assets can meet high specifications that will keep it in contention for most deepwater drilling jobs, Ensco's pre-2014 drillships (of which four out of six currently are without work) and Ensco's semi-submersible rigs (several of which are without work) are unlikely to find work until after newer and more desirable assets such as those owned by Rowan are first employed.
Rowan's Balance Sheet is Superior
The proposed merger also, in Canyon's view, makes little financial sense for Rowan given its superior balance sheet. Rowan has only $2.5 billion in total long-term debt, of which around one-third will not mature until at least 2042, and it has over a billion dollars in cash that it can use to pay down obligations due before then. On the other hand, Ensco has $5.2 billion in long-term debt, but carries only $630 million in cash and short-term investments against $3.6 billion of the debt that matures in the next ten years.
Notwithstanding that substantial imbalance in financial profiles, the January 3, 2019 presentation released by Rowan asserts that the pro forma company will have increased contracted backlog and greater liquidity over the next five years and thereby will provide greater stability and near-term downside protection for Rowan's shareholders.1 But that ignores the more than $4.5 billion of debt maturing between 2024 and 2027, $3.6 billion of which is Ensco's.2
The fact is, Rowan has nearly twice the cash and half the debt of Ensco. Based on Ensco's financial advisor's own analysis of asset value, which we further discuss below, while Rowan's net debt as a percentage of gross asset value is only 30% (or 37% as a percentage of pre-deal enterprise value), Ensco's net debt as a percentage of gross asset value is 55% (and is 55% of pre-deal enterprise value as well). That means Rowan shareholders would be exposed to significantly greater leverage and financial risk following a merger.3 As we discuss further below, that exposure is even greater given asset values as we calculate them and greater still given subsequent market developments.
Part of the reason for Rowan's superior financial profile is that, in contrast to Ensco, it has refrained from large scale mergers and acquisitions. Ensco previously has engaged in two significant acquisitions, of Pride International, Inc. (in 2011) and of Atwood Oceanics, Inc. (in 2017). Both of those transactions saddled Ensco with additional debt, in the case of Pride as a result of debt taken on to accomplish the transaction and in the case of Atwood (the acquisition of which Institutional Shareholder Services recommended that Ensco shareholders vote down) as a result of debt Atwood already was carrying. Ensco's stock has significantly underperformed that of Rowan and other Ensco competitors since those acquisitions.4 In an industry challenged to create value for shareholders, Ensco has been a leader in eroding it.
The Merger Significantly Undervalues Rowan
Despite Rowan's superior assets and balance sheet, the Company's Board of Directors (the "Board") agreed to a deal whereby Rowan's shareholders will receive just 2.215 Ensco shares for each Rowan share held. Canyon believes this consideration is grossly inadequate and does not sufficiently compensate Rowan or its shareholders for de-risking Ensco's operational and financial profile. Instead of striking a deal that appropriately values the Company, the Board agreed to an "at-market" transaction providing Rowan's shareholders no premium over Rowan's pre-announcement share price.
What is more, Canyon believes that at the time the deal was struck the market had not yet had sufficient time to digest and price the material information that the Company disclosed a few weeks earlier about its valuable 50/50 joint venture with Saudi Aramco. At least one analyst valued the joint venture at $1 billion5—which is roughly equal to Rowan's current market capitalization of $1.2 billion—and others have noted its potential to enable Rowan's stock to get more credit6. The joint venture's value is only enhanced by continued instability in the oil market given its ability to keep its assets working in a low oil price environment.
In our view, a proposal that calculated the consideration based on whatever the prior day's share prices happened to be clearly failed to account for the quality discrepancies in the companies' assets and balance sheets. The fact that Ensco's "at-market" proposal on June 5 had a ratio of 2.5 Ensco shares to 1 of Rowan's (which we believe was woefully inadequate as a starting point) and that the ratio fluctuated as much as 28% during the course of negotiations reflects how haphazard the prior-day share price methodology was. Ensco's financial advisor's own analysis of each company's share price to net asset value ("NAV") ratio further reveals the valuation discrepancy between the companies that arises from relying solely on their share prices.7 We believe that an appropriate NAV analysis—a better indication of value than a simple discounted cash flow analysis in our opinion—yields a very substantially higher ratio in Rowan's favor (significantly higher than what would even be implied by Ensco's financial advisor's analysis). Although NAV is relied upon by many analysts in the industry, Rowan's financial advisor's fairness opinion employed a discounted cash flow analysis and made no reference to NAV.
Not only was the proposed transaction unfavorable to Rowan at the time the deal was struck, but subsequent market developments—including the significant fall in Brent crude prices amid global economic and geopolitical uncertainty—have made it even less favorable in our opinion. At the time the deal was announced, oil prices were rising and Canyon's model yielded an appropriate NAV exchange ratio of 4-to-1 in favor of Rowan (compared to the 2.215-to-1 exchange ratio to which the Company agreed) due to the superiority of Rowan's asset base. In the three months since, prevailing market conditions have changed substantially: oil prices have tumbled more than 30%, valuations in the sector have collapsed and credit risk has risen considerably. In the current environment, balance sheet quality is paramount, compounding the imbalance between an appropriate NAV exchange ratio and the proposed merger consideration Rowan's shareholders will receive. Even adjusting both Rowan's and Ensco's gross asset values down by 20% to reflect current market conditions (which Canyon believes overstates the impact on Rowan), Ensco's significantly greater leverage increases the appropriate exchange rate to at least five Ensco shares for each Rowan share—without taking into account the premium Rowan's shareholders should receive because of Rowan's balance sheet's greater ability to withstand further downside risk.
In its recent presentation the Company attempts to justify the "at market" exchange ratio of 2.215 Ensco shares for each Rowan share as actually reflecting "a 29% premium to the long-term average" of 1.722x during the period January 1, 2015 through the date prior to the announcement of the proposed transaction.8 However, using the companies' historical stock prices to support the exchange ratio makes little sense, effectively giving Ensco credit for the additional risk its significantly greater leverage poses to Rowan's shareholders. As a direct result of that far riskier profile, Ensco's stock price plummeted by 70% during that period, compared to an 18% decline in the price of Rowan's stock price and to stock price declines of 21%, 45% and 52% for competitors Transocean, Ltd., Diamond Offshore Drilling, Inc. and Noble Corporation plc, respectively.
Rowan's effort in its presentation to focus on the performance of Rowan's stock price relative to its peers post-announcement also misses the mark. Despite proclaiming that Rowan's "share price significantly outperformed" that of its competitors' post-announcement, the Company actually limits its peer comparison to the first month after the deal was announced.9 And for good reason. Since the deal was announced, Ensco and Rowan have suffered stock price declines of 51% and 49%, respectively, while Transocean and Diamond have outperformed Rowan with stock price declines of 44% and 46%, respectively10. But for Rowan being tethered to the proposed transaction, it is hard to believe that its stock would not have outperformed Ensco's as it has in the past.
Neither the transaction exchange ratio nor a marginal increase in it would suffice for the vastly increased risk that Ensco brings to the combination.
The Proposed Merger is the Product of a Flawed Process
According to Rowan, the proposed merger with Ensco is the product of an extensive, multi-year review of strategic alternatives, including "dialogue" with a number of potentially interested parties, and was deemed by the Board as the superior option to maximize value for the Company's shareholders.11 But we have seen no evidence that, prior to agreeing to the proposed transaction, the Company conducted a comprehensive competitive sale process to determine whether a sale could be accomplished at an appropriate price and, if so, to strike that price. Of the ten potential alternative transactions the Company supposedly contemplated over a period of several years, no transaction is sufficiently described to provide meaningful insight into how aggressively those opportunities were pursued, and at least half of them appear to have been contemplated acquisitions by Rowan rather than sales.12
What is more, Rowan's non-executive directors collectively own just 0.3% of the Company's outstanding shares, and delegated responsibility for Rowan's negotiations with Ensco to Rowan's CEO, Dr. Tom Burke, despite the fact that his position in the combined company—ultimately becoming its proposed CEO—would be and was a subject in the negotiations. Indeed, in the month before the transaction was agreed to, Dr. Burke and his counterpart at Ensco "concluded that the governance arrangements were the most significant issues remaining."13
Canyon is a strong believer in the strength and quality of the Company's assets. Unfortunately, the proposed transaction does not reflect such a belief, and fails to offer Rowan shareholders adequate compensation. If the proposed merger is voted down, Rowan will continue to provide significant standalone value and can choose to run a comprehensive competitive sale process whereby it actively solicits potential suitors, seriously considers whether more value can be obtained by selling different segments of the Company to different suitors, and assures that any resulting negotiations are conducted by those whose interests are aligned with shareholders'. Unfortunately, the proposed Rowan-Ensco merger did not result from such a process, significantly undervalues Rowan, and exposes Rowan and its shareholders to substantially greater operational and financial risk.
Accordingly, Canyon intends to vote against the proposed Rowan-Ensco merger.
Canyon Capital Advisors LLC,
on behalf of its managed funds and accounts
About Canyon Partners
Founded and partner owned since 1990, Canyon employs a deep value, credit intensive approach across its investment platform. Canyon specializes in value-oriented special situation investments for endowments, foundations, pension funds, sovereign wealth funds, family offices and other institutional investors. We invest across a broad range of asset classes, including distressed loans, corporate bonds, convertible bonds, securitized assets, direct investments, real estate, arbitrage, and event-oriented equities. For more information visit: www.canyonpartners.com.
Cautionary Statement Regarding Forward-Looking Statements
All statements contained in this press release that are not clearly historical in nature or that necessarily depend on future events are "forward-looking statements," which are not guarantees of future performance or results, and the words "anticipate," "believe," "expect," "potential," "could," "opportunity," "estimate," "plan," and similar expressions are generally intended to identify forward-looking statements. The projected results and statements contained in this press release that are not historical facts are based on current expectations, speak only as of the date of this press release and involve risks that may cause the actual results to be materially different. In light of the significant uncertainties inherent in the forward-looking statements, the inclusion of such information should not be regarded as a representation as to future results. Canyon disclaims any obligation to update the information herein and reserves the right to change any of its opinions expressed herein at any time as it deems appropriate. Canyon has not sought or obtained consent from any third party to use any statements or information indicated herein as having been obtained or derived from statements made or published by third parties.
1 Rowan Companies plc, Proxy Statement (Form DEFA14A), at 17-19, 21 (Jan. 3, 2019) (highlighting the purported benefits of the combined company's enhanced financial flexibility in the near-term and its ability to service $1.1 billion of debt maturities through 2023).
2 While Rowan's presentation also notes that $850 million of the $1.8 billion in Ensco debt that matures in 2024 is convertible, the conversion price is $14 per share. The conversion price exceeds the current trading price of Ensco's stock by over 3.5x, and in fact exceeds the highest price at which Ensco's stock has traded since the convert was issued.
3 Rowan's net debt is calculated using the financial information reported in its 3Q2018 Form 10-Q, filed on October 31, 2018, with a pro forma adjustment for $90 million in cash proceeds received by the Company after the quarter ended.
4 In the period from a day before the Pride transaction to a day before the Rowan deal was announced, Ensco's stock declined by almost 81% compared to declines of about 47% for Rowan, 64% for Diamond Offshore Drilling, Inc., 73% for Noble Corporation plc and 78% for Transocean, Ltd. Beginning a day before the Atwood transaction to a day before the Rowan deal was announced, Ensco's stock rose by about 27% compared to increases of about 53% for Rowan, 64% for Diamond, 75% for Noble Corporation plc and 43% for Transocean.
5 Citigroup, Rowan Companies plc (RDC): Upgrading to Buy – Secular Jackup Winner (Sept. 7, 2018).
6 DNB Markets, Rowan: ARO Visibility Increased (Sept. 4, 2018); Clarksons Platou Securities AS, Rowan Companies: New Disclosure Confirms Our View and Adds Upside Potential (Sept. 5, 2018).
7 The analysis conducted by Ensco's financial advisor yielded an implied share price range of $19.54 to $31.52 per Rowan ordinary share and $6.56 to $10.51 per Ensco ordinary share based on NAV. Rowan Companies plc, Proxy Statement (Form DEFM14A), at 102 (Dec. 11, 2018). That range translates into an implied exchange rate of 2.978 Ensco shares for each Rowan share at the low-end, 2.989 Ensco shares for each Rowan share at the mid-point and 2.999 Ensco shares for each Rowan share at the high-end.
8 Rowan Companies plc, Proxy Statement (Form DEFA14A), at 29 (Jan. 3, 2019).
9 Id. at 23.
10 Noble Corporation plc's performance was worse during this period, but that is understandable particularly given the significant fraudulent conveyance litigation in which it has been embroiled.
11 Rowan Companies plc, Proxy Statement (Form DEFA14A), at 27 (Jan. 3, 2019).
12 Rowan Companies plc, Proxy Statement (Form DEFM14A), at 73-81 (Dec. 11, 2018); Rowan Companies plc, Proxy Statement (Form DEFA14A), at 28 (Jan. 3, 2019).
13 Rowan Companies plc, Proxy Statement (Form DEFM14A), at 83 (Dec. 11, 2018).