Shares of Ocean Rig UDW Inc. (NASDAQ: ORIG) rallied nearly 12% by 10:45 a.m. EDT on Tuesday after Transocean (NYSE:RIG) agreed to acquire the offshore driller for $2.7 billion in cash and stock.
Transocean offered 1.6128 shares of its stock and $12.75 per share in cash for each of Ocean Rig's shares. The deal implies a value of $32.28 per share, which is a 20.4% premium to its average price in the 10 trading days before the announcement. Current investors in Ocean Rig would own 21% of the combined company once the deal closes, which Transocean expects will happen in the first quarter of next year.
The transaction will enhance Transocean's position as a leader in the ultra-deepwater and harsh environment drilling markets by adding 13 rigs to the company's fleet, bringing it up to 57. Furthermore, it will increase Transocean's industry-leading contract backlog by $743 million, boosting the total to $12.5 billion. On top of that, Transocean expects to capture about $70 million in annual cost synergies.
Since current Ocean Rig investors would receive shares of Transocean in the deal in addition to cash, they need to decide if they want to eventually hold that stock or cash out now. While the bird in the hand approach of cashing out makes sense, investors should first take a close look at what Transocean has to offer. By some measures, its stock is absurdly cheap right now. Because of that, it could be a massive winner if oil prices continue rising in the coming years.