Noble shareholders voice concerns over Maersk merger plans despite ‘appealing optics’

Following an announcement that two offshore drilling contractors – Maersk Drilling and Noble Corporation – are merging in an all-stock transaction, certain shareholders have voiced their concerns over the proposed plan.

Wednesday morning kicked off with a major update from the offshore drilling market as Maersk and Noble announced they would be merging into a new company. Following the completion, the Maersk Drilling shareholders and Noble shareholders will each own approximately 50 per cent of the outstanding shares of the combined company, which will have a high-end fleet comprising of 20 floaters and 19 jack-up rigs.

The approximate 50 per cent ownership percentage of the Maersk Drilling and Noble shareholders is calculated using 66.6 million shares for Noble shareholders and assumes that all Maersk Drilling shares are tendered in the exchange offer for shares.

Both Maersk Drilling’s and Noble’s Chairpersons of the board pointed out that the combination would create meaningful value for all shareholders and offer investors a unique opportunity to benefit from the market recovery. However, not everyone agrees.

Just as the dust around the merger announcement settled, a Noble Corporation shareholder has voiced concerns over the proposed deal. Namely, Cyprus-based S.D. Standard Drilling said it had sent a letter to the Chairman of the board of directors of Noble Corporation, regarding the proposed merger with Maersk Drilling. The shareholder said it would consider voting against the merger. Standard Drilling secured a 1 per cent ownership in Noble in March 2021.

The company said last August it had realized its holdings in Noble with a net profit of $2 million. At the end of the second quarter of 2021, Standard Drilling held shares in Noble Corporation and Weatherford International for $26 million, classified as financial assets held for trading.

Martin Nes, Chairman of the Board of Directors of Standard Drilling, said: “Standard Drilling fully supports industry consolidation in the offshore drilling market. However, we, and other shareholders that have contacted us, are concerned about the proposed exchange ratio and will consider to vote against the transaction.”

The letter points out that the merger was presented as one of the equals and that the optics are appealing, creating an offshore drilling powerhouse with scale and unlocking synergies to the tune of $125 million per annum. The combined entity will be cash flow positive from day one, and have an earnings capacity similar to that of Transocean, despite having just half of the enterprise value, according to Standard Drilling. As previously reported, the combined market capitalisation of the two companies is estimated at approximately $3.4 billion.

The letter further stated: “Standard Drilling fully supports industry consolidation in the offshore drilling market, but in our view this is not a merger of equals. The transaction between Noble and Maersk Drilling implies a c. 40%/ 60% split basis enterprise value and a c. 30% premium in the DRLCO (Maersk Drilling) share price vs close on November 9th.

“We argue the value of 7G floaters, of which Noble has 7, should be comparable to CJ70 jack-ups, of which DRLCO has 5. This is due to better rates and utilization presently in the floater market. On this basis, we argue the gross asset values in the two companies are similar. This view is also supported by the multiples in the proposed transaction, with Noble trading at 6x ’22 EV/ EBITDA with 7% FCF yield while Maersk Drilling would trade at ‘13x with 1% FCF yield.”

Standard Drilling, as a shareholder in Noble, emphasised it would, at the proposed exchange ratio where Maersk Drilling would receive c 1.614 Noble shares, consider to vote against the transaction.

The company also added it had been contacted by “other major shareholders who share our concerns.”

It is important to mention here that the deal between Maersk and Noble is subject to approval from Noble shareholders as well as acceptance of the exchange offer by holders of at least 80 per cent of Maersk Drilling’s shares, merger clearance, and other regulatory approvals, listings on New York Stock Exchange and Nasdaq Copenhagen, and other customary conditions.

Noble and Maersk said this morning that the business combination agreement had been unanimously approved by the boards of both companies and it was also supported by major shareholders of both companies, including Noble’s top three shareholders, which collectively currently own approximately 53 per cent of Noble shares, and APMH Invest A/S, which currently owns approximately 42 per cent of the share capital and votes of Maersk Drilling.

Also worth pointing out is the fact that the merger agreement contains certain termination rights for both Noble and Maersk Drilling, including if the Noble shareholders have not approved the combination.

If the merger goes through, the combined company will be named Noble Corporation and its shares will be listed on the New York Stock Exchange and Nasdaq Copenhagen. The combined company will also have a seven-member board of directors and Noble’s boss will be the CEO and the President of the combined entity.

The two companies expect the potential annual cost synergies of $125 million to be front-loaded with the full potential to be realized within two years after the closing of the transaction, which is expected in mid-2022.