Schlumberger to Buy Smith for About $11.3 Billion

Schlumberger Ltd., the world’s largest oilfield services company, will buy Smith International Inc. for about $11.3 billion in an all-stock transaction, gaining sole ownership of the biggest drilling-fluids provider.

The $45.84-a-share price represents a 37.5 percent premium to Smith’s closing price on Feb. 18. Smith holders will get 0.6966 Schlumberger share for each share they hold, the companies said in a statement.

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Including its M-I Swaco joint venture with Schlumberger, Houston-based Smith is the world’s largest provider of oil and natural-gas drilling fluids. Smith is the second-biggest provider of drill bits, a “critical link” for Schlumberger in offering a full range of drilling products and services, RBC Capital Markets said Feb. 19 in a note to clients.

“Smith’s drilling techniques, other products and expertise complement our own, while the geographical footprint of Schlumberger means we can extend our joint offerings worldwide,” Schlumberger Chief Executive Officer Andrew Gould said in the statement.

Pretax Savings

Schlumberger, based in Houston and Paris, said it expects to see pretax savings of $160 million next year and $320 million in 2012, with the transaction adding to earnings in 2012. Schlumberger had sales of $22.7 billion last year, a 16 percent drop from 2008.

Smith had net debt of $1.2 billion as of the end of 2009, it said in a Jan. 27 statement.

The transaction is the biggest U.S. merger for this year and is Schlumberger’s biggest acquisition, according to Bloomberg data. It’s also the biggest acquisition of an oilfield-services company since Bloomberg began tracking merger statistics more than a decade ago.

The deal is expected to close in the second half of this year after obtaining the required regulatory and shareholder approvals, Schlumberger said.

Schlumberger is getting advice on the transaction from Goldman Sachs Group Inc. and Baker Botts LLP. Smith is using UBS AG and Wachtell Lipton Rosen & Katz.

Smith jumped $4.35, or 13 percent, to $37.70 on Feb. 19 in New York Stock Exchange composite trading after reports the companies were in talks. The stock had climbed 39 percent this year. Schlumberger dropped $1.91, or 2.9 percent, to $63.90.

“When I look at the fact that Smith has a relatively weak balance sheet and a relatively narrow product offering, I can see why it would be better for Smith in the long run to be acquired,” said Philip Weiss, an analyst at Argus Research in New York, who rates both shares at “sell” and owns none.

Investor Note

The purchase could dilute Schlumberger’s brand as a technology provider with high margins, Scott Gruber and Ben Dell, analysts at Sanford C. Bernstein & Co. Inc., wrote Feb. 19 in a note to investors.

“Smith’s products are manufacturing intensive and broadly generate lower margins,” the analysts wrote in the note.

At the same time, Schlumberger benefits by gaining sole ownership over the M-I Swaco venture it shares with Smith, Weiss said. Smith has a 60 percent interest in the joint venture, which generated $4.22 billion of Smith’s $8.22 billion in revenue in 2009.

Antitrust Concerns

A takeover of Smith could prompt antitrust regulators to force asset sales to prevent Schlumberger from having too much market share in certain categories, said Weiss, the Argus Research analyst. Areas of overlap between the companies include directional drilling and logging of well results, according to a note to clients Feb. 19 by Houston investment bank Tudor, Pickering, Holt & Co.

“We would expect a high degree of antitrust scrutiny because of the overall size and scope” of Schlumberger’s operations, Geoff Kieburtz, an analyst at Weeden & Co. in Greenwich, Connecticut, wrote in a note to investors Feb. 19. “However the overlap between business lines is relatively small.”

Smith’s Wilson distribution business, which provides a range of supplies including pipes for energy companies, might be sold by Schlumberger because it wouldn’t fit in the company’s long-term plans, said Kurt Hallead, an analyst at RBC Capital Markets in Austin who rates the shares an “outperform” and owns none.

Executive Move

Schlumberger announced Feb. 8 that Paal Kibsgaard would be its chief operating officer, a move that was expected to give CEO Gould, 63, more time to work on big-picture issues, including potential mergers and acquisitions, said Bill Herbert, an analyst at Simmons & Co. in Houston.

Gould previously indicated that mergers could be on the horizon. Consolidation among “smaller” service companies in North America will continue through this year, he told reporters Sept. 8 in Aberdeen, Scotland.

Smith chief executive John Yearwood was promoted to CEO of Smith in January 2009. He said in a Dec. 7 interview the company was focused on work related to drilling and completing wells, especially in offshore projects with water depths of more than 1,500 feet (457 meters), and unconventional formations such as shale. Yearwood said Smith expects “impressive” growth from environmental services.

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