National Oilwell Set To Acquire Grant Prideco

National Oilwell Varco Inc., the oil and gas service company announced on Monday that it has decided to acquire the Houston-based drill equipment specialists, Grant Prideco Inc. for about $7 billion. The deal is seen as a means of broadening National Oilwell’s product range for customers in fast-growing international markets.

National Oilwell has agreed to pay $23.20 in cash and 0.4498 of its shares for each Grant Prideco share. The deal thus values Grant Prideco at $54 per share which is about 15.5% premium to Grant’s $47.46 closing price on Friday. National Oilwell will be issuing about 57 million shares and pay out $3 billion in cash.

According to National Oilwell the deal is expected to add to earnings and cash flow and save $40 million in costs next year. They added that this acquisition will not affect Grant Prideco's pending $800 million sale of its tubular business to Vallourec.

Looking at Friday’s closing prices; National Oilwell’s market capitalization stands at $27.6 billion and Grant Prideco’s at $6.0 billion which brings the total combined market value to $33.6 billion.

The deal has found approval from analysts who see it as a good strategic fit. But there have been concerns about the timing of the deal when Grant Prideco's drill pipe business has been soft for a little while. However, the analysts agree that the deal does make sense for the long term.

The CEO of National Oilwell, Peter Miller, said, "We don't want to merge for what's going to happen over the next quarter or two. We want to merge for what's going to happen over the next 10 years, and we feel very good that what we have done here today is going to make that a positive for the shareholders of this company."

He added, "We are delighted with the way this transaction advances our strategic goal of providing more products and services to our customers. We believe Grant Prideco's product range will add new growing market segments to National Oilwell Varco and benefit our customers' needs worldwide."

A Grant Prideco shareholder vote is likely to take place late in the first quarter of 2008 or early in the second quarter for approval of the deal. This merger comes in the wake of rival offshore drilling contractor, Transocean buying GlobalSantaFe for $18 billion in a deal that closed last month.

Michael McShane, chairman and chief executive of Grant Prideco said, "This is a great transaction for our shareholders in which they realize a significant premium and have the opportunity to participate in a larger, more diverse company.”

The shares of National Oilwell have risen 111.8% in the past year while shares of Grant have risen 22.7%. Their business is expected to post strong growth on the back of oil prices that have hovered near $90 per barrel.

The news of the deal led to a 13.6% surge in Grant Prideco stock which closed at $53.91. On the other hand, National Oilwell Varco stock fell nearly 9% to close at $70.69.