By: Jon Costello
Previous article on Transocean’s acquisition of Valaris.
I remain long Transocean (RIG) and Valaris (VAL) for myself and clients. Since I last reviewed the position, an important source of risk has been removed.
On September 30, Transocean and Valaris disclosed that the Justice Department’s Antitrust Division had closed its investigation of the merger under the Hart-Scott-Rodino Act and that the waiting period had expired. CFIUS had already cleared the transaction in June. The companies now expect the combination to close in the fourth quarter, subject to the remaining conditions.
These developments do not mean the deal is complete. The definitive joint proxy statement has not yet been filed, so shareholder approvals remain outstanding, as does the Bermuda court process required for the scheme of arrangement. Brazil’s CADE review was publicly notified in July, and I found no published decision as of October 1.
With U.S. antitrust risk reduced, the focus shifts to execution. The questions now are whether the deal closes, whether management can integrate Valaris without losing the expected cost savings, whether debt comes down, and whether stronger offshore pricing eventually translates into higher free cash flow for shareholders.
The U.S. Antitrust Risk Has Now Receded
The Justice Department’s decision deserves more weight than the routine expiration of an initial HSR waiting period.
Transocean and Valaris first filed under the HSR Act on March 2. Transocean withdrew its filing on April 1 and refiled on April 3. On May 4, the Justice Department issued a Second Request, requiring additional information and extending the review.
On September 30, the companies disclosed that the Antitrust Division had closed its investigation and the HSR waiting period had expired. The filing did not disclose a divestiture, consent decree or other remedy. CFIUS had already provided written clearance on June 29.
The latest filing says the companies expect a fourth-quarter close, subject to the remaining conditions. But the risk profile is plainly different from what it was a month ago. A U.S. antitrust challenge was one of the most visible obstacles to the transaction. That obstacle has now receded.
If the deal were to fail for another reason, I would still want to own Transocean. The deepwater thesis predates the agreement to acquire Valaris, and Transocean was already making progress on its balance sheet. Net debt declined to $4.31 billion at June 30 from $4.52 billion at March 31. Losing Valaris, however, would remove what I view as the clearest path to accelerating that improvement.