GSF & Transocean, a new low-premium merger of equals model?

This morning was a huge day in merger mania, particularly since a deal of this size is not the norm in the oil patch.

GlobalSantaFe Corporation (NYSE:GSF) and Transocean Inc. (NYSE:RIG) have agreed to what is really boiling down to a no-premium merger, and somewhat a merger of equals. Shares of both are trading up because of a cash payout that will work out into a recapitalization.

The new company will own 146 drilling rigs and will reduce the annuals operating costs by $100 million to $150 million per year by 2010. The companies are saying the new entity will have an enterprise value of $53 Billion between the stock and debt and the surviving name is going to be TRANSOCEAN under the existing "RIG" ticker. The backlog for the combined company is also said to be roughly $33 billion.

The recapitalization here is that both shareholders are going to receive back some $15 billion in cash and retain "new-co" shares. Transocean holders will receive $33.03 in cash plus 0.6996 new shares, while GlobalSantaFe holders will get $22.46 cash and 0.4757 'new-co' shares. So here is the issue, this is a massive merger of equals meant to trim operating costs.

Following the merger, Robert E. Rose, currently GlobalSantaFe's Chairman, will serve as Transocean's Chairman of the Board of Directors. Robert L. Long will continue as Transocean's Chief Executive Officer and Jon A. Marshall (current GlobalSantaFe President & CEO) will assume the position of President & COO, while other senior management positions will be named later.

The first question that comes to mind is just how much this will bite into operations at other oil service companies. Will this directly attack Schlumberger (NYSE:SLB) or Halliburton (NYSE:HAL)? Schlumberger could of course worry, but the truth is that the company is far larger, more diversified, and well-heeled into global operations. Halliburton has already made more of a push to its overseas operations with a move of its top brass to Dubai. Perhaps the most important measure to consider here is that despite a premium reaction today in shares, this may actually take out some of the high-premium merger hopes. Maybe oil executives aren't willing to bet that super-high energy prices will prevail indefinitely, but that is just one side of a coin.

This probably sets a floor for some companies that could come into play in the merger or 'deal' arena, but it certainly doesn't scream "hugely undervalued" when two companies of this size do a low-premium merger of equals that is arguably "creating a larger size for the sake of size."

Jon Ogg can be reached at jonogg@247wallst.com; he does not own securities in the companies he covers.