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An Interesting Merger Arb Play



February 11, 2011 – Comments (2) | RELATED TICKERS: ESV , PDE.DL , SDRL


As a happy shareholder of the driller Ensco (ESV), I was somewhat surprised by the company's recently announced takeover of Pride (PDE).  See article...Pride International Shares Popped: What You Need to Know.

I was just thinking about the deal and it seems to me as though it could be an interesting merger arb play.  There's currently around a 2.5% spread between PDE's price per share and the price that Ensco is offering for the company.  Since some of the deal is in ESV stock, 0.4778 shares + $15.60 in cash, PDE's share price should continue to increase if drillers (specifically ESV's) share price increases.

As an added bonus, in the unlikely event that Seadrill (SDRL), a 9.4% stakeholder in PDE when the deal was announced who has expressed interest in taking over PDE in the past, makes a hostile takeover bid for the company we would capture any upside.

This wouldn't be a great play in CAPS in the midst of a massive bull market, but it looks like an interesting real-life trade (I'll probably do it anyhow just for the heck of it...isn't fake money fun).  You're looking at a 2.5% return likely in less than a year if the market remains flat, that beats any short-term bond.  [Anyone have any estimates as to how long this deal will take to complete?  That is important because if it's a year we're looking at a 2.5% return, six months a 5% return, etc...]

As an added bonus you have the ability to capture some of the gains if the market continues to rise.  Plus the potential for a higher bid for Pride still exists.

When all is said and done, if the merger goes through you can either flip your shares for the merger arb profit OR hold onto a new drilling powerhouse. 

Even with the premium that it paid, the deal looks pretty attractive for Ensco. 

It will be immediately accretive to ESV's earnings. 

The company should be able to squeeze $50 million in annual cost synergies out of the combined entity starting in 2012. 

The deal broadens Ensco's customer base and opens new markets to the combined company. 

The combined company will have world's second largest offshore rig fleet, including the industry's second youngest and second largest deepwater fleet / youngest and third largest ultra-deepwater fleet.

Previously 72% of Ensco's revenue came from jackups. After the merger this percentage will drop to 43% jackup (44% deepwater).

The company's revenue backlog and cashflows should enable it to pay for its new rigs and debt and still maintain the current dividend, which is just under 3%.

There's a lot to like about Pride's stock right now...even after its recent pop.



2 Comments – Post Your Own

#1) On February 11, 2011 at 5:27 PM, thecherryz (84.90) wrote:

I think holding ensco is better than buying pride, ensco still has a lot more upside.  If it was all stock i'd definitely buy pride, but it's not.

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#2) On February 13, 2011 at 4:13 PM, XMFConnor (97.27) wrote:

Interesting.. I'll have to do my hw on this one

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