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Rowan Gets Increased Exchange Ratio Proposal From Ensco

Zacks Equity Research

Rowan Companies plc RDC has received a proposal from Ensco plc ESV to increase the exchange ratio for the previously-announced transaction in which Rowan would merge with Ensco. It will be an all-stock deal.

Per the terms of the proposal, Rowan shareholders would receive 2.60 shares of Ensco for each share of Rowan, up about 17.4% compared to the 2.215 exchange ratio considered under the definitive agreement entered into on Oct 7, 2018.

This new proposal will be reviewed by Rowan’s board of directors and accordingly, will decide the course of action that the board believes is in the best interest of the company and its shareholders.

On completion of the deal, the combined company’s board of directors will include Ensco’s president and CEO, Carl Trowell, as well as Rowan president and chief executive officer, Tom Burke. The board will also include five additional members from Ensco’s current board and four additional members from Rowan’s current board.

The combined company will have a fleet of 82 offshore rigs, which includes 28 floaters and 54 jack-ups. This includes two drillships as well as a jack-up rig under construction and does not include rigs that are part of Rowan’s ARO JV in Saudi Arabia. The new entity will possess the most technically-advanced fleet in the industry.

This merger will create a leading offshore driller based on the fleet size, geographic presence and customer base.

The new entity will likely realize annual pre-tax synergies of about $150 million. Of the total, more than 75% of targeted synergies are projected to be realized within a year of closing. The deal, expected to close in the first half of 2019, is estimated to be accretive to cash flow per share in 2020.

The combined company’s balance sheet is expected to have liquidity of about $3.9 billion, including $1.9 billion of cash and short-term investments. This will provide the entity financial flexibility to continue fleet upgrade and improve drilling efficiencies. The total revenue backlog for the combined company is estimated at about $2.7 billion, excluding ARO Drilling’s substantial backlog that is unconsolidated.

Zacks Rank & Key Picks

Currently, Rowan carries a Zacks Rank #3 (Hold).

A few better-ranked players in the energy space are Shell Midstream Partners, L.P SHLX and Unit Corporation UNT, each sporting a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Headquartered in Houston, TX, Shell Midstream Partners owns, operates, develops and acquires pipelines, as well as other midstream assets. The company is expected to witness year-over-year earnings growth of 18.7% in 2018.

Unit Corp is a diversified energy company. The company generated average positive surprise of 21.2% in the trailing four quarters.

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