Transocean's Unnecessary $15 Billion in Debt

I love this Transocean-GlobalSantaFe deal. For one thing, I love any deal which creates a $53 billion company by combining two firms that almost no one has ever heard of. And for another thing, I love the idea that even though Transocean (market cap: $32 billion) is clearly acquiring GlobalSantaFe (market cap: $17 billion), the deal is still being described with a straight face as a "merger of equals".

My favorite bit of all, however, is the way that the combined company is going to have to raise $15 billion in order to finance this, er, all-stock deal. Even as debt offerings are being pulled or downsized across the markets, these drillers are borrowing money for no real purpose other than giving it straight to their shareholders. Bloomberg quotes Morgan Keegan's Michael Drickamer:

Because the drillers were earning money faster than they could reinvest it wisely, giving cash to shareholders through the deal makes sense, Drickamer said.

But it's not as simple as that. Here's Reuters, with a bit more detail:

"This is the type of transaction shareholders have been clamoring for," said Mark Urness, an analyst with Calyon Securities.
"They have managed to dividend-out a portion of their backlogs," Urness said.
The combined company would use its first two years of free cash flow to reduce debt.

Essentially, the companies are borrowing $15 billion, giving it to their shareholders, and will then spend the next two years paying that money back as fast as possible out of cashflow. Apparently, this makes more sense than just taking the cashflow and giving that to shareholders.

The era of leveraged deals is far from over, it would seem.