What: Units of offshore drilling MLP Transocean Partners (NYSE: RIGP) jumped as much as 10% on Monday morning after parent company Transocean (NYSE:RIG) agreed to acquire it.
So what: Transocean is offering a share-for-unit exchange to acquire all of the outstanding units of its MLP that it does not currently own. The company is offering 1.1427 of its shares for every Transocean Partners unit, which represents a 15% premium to its previous closing price. The company anticipates the transaction will close by the end of the year.
This deal will consolidate Transocean's ownership interests in the three drilling vessels owned by its MLP, which owns 51% stakes in Discoverer Inspiration, the Discoverer Clear Leader, and the Development Driller III. By consolidating its interests, Transocean will simplify its structure, reduce costs, and improve its liquidity.
That said, this transaction represents a failure of Transocean's MLP strategy. It was just two years ago that the company launched its MLP to "complement its capital structure by providing additional financial flexibility, and enhance the execution of its asset strategy." However, as a result of the deepening downturn in the offshore drilling sector, that strategy has not worked. Instead, the company is now absorbing that entity as it charts a new way forward.
Now what: This agreement certainly makes financial sense for Transocean because it will save about $39 million per year in cash flow by eliminating the distributions to public unitholders as well as public company costs. Further, given that Transocean already has a 71% ownership interest in Transocean Partners and a 49% interest in its three vessels, consolidating will eliminate some unnecessary complexity. Because of this, investors can pretty much bank on this deal going through.