Sunday, February 21, 2010

Now it's official...Schlumberger buys Smith International (SLB,SII)

After news of the potential deal leaked out last week, oilfield services firms Schlumberger and Smith International wrapped upped the details of their merger and announced it a couple hours ago...

The deal be will an all-stock transaction, with Smith (SII) shareholders receiving .6966 shares of SLB stock for each SII stock they hold.

The stock exchange ratio works out to 44.51 per share of SII, an 18% premium even after Friday's 13% jump in the shares. Not too shabby.

In the press release, Schlumberger points out - probably in slight frustration - that the deal is actually a higher premium, if you base it on Thursday's prices which were "undisturbed" by the deal rumors....

Under the terms of the agreement, Smith shareholders will receive 0.6966 shares of Schlumberger in exchange for each Smith share. Based upon the undisturbed closing stock prices for both companies on February 18, 2010, the agreement places a value of $45.84 per Smith share, representing a 37.5% premium. Upon closing, and reflecting the issuance of new Schlumberger shares, Smith stockholders collectively will own approximately 12.8% of Schlumberger’s outstanding shares of common stock.

As for the price, Schlumberger is getting a bargain buying Smith at a 47% discount to it's five year trading high near $84. A quick look at the valuation based on Smith's recent or near-term expectations makes the deal look appropriately priced, but SLB is basically "buying gross profits." Despite Smith's bottom line lumpiness, their current gross margin is with 2% of Schlumberger's, and the 5 year maximum is within 5%. Schlumberger is going to take these gross profits and do more with them (profitability-wise) than Smith has been able to do. SLB is buying Smith for a bit over one times sales, compared to it's own valuation of 3.3 times sales.

Great deal for Schlumberger. I wouldn't be surprised though, to see Smith shareholders a little peeved. If SLB trades down a bit tomorrow, the deal's implied value would be about $43, versus the $44.51 based on Friday's prices. Given the pretty cheap valuation involved, I don't think SLB shares should trade down too much...

Copyright 2010 AlphaNinja

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