Rowan Companies, Inc. (RDC) has struck an asset sale deal with a leading mining equipment maker, Joy Global Inc. (JOYG) for its manufacturing unit, LeTourneau Technologies, Inc. The all-cash transaction worth $1.1 billion has been approved by the companies’ boards of directors and is scheduled to close within 60 days, following regulatory approval.
The Houston, Texas-based contract drilling and aviation service provider expects to utilize the after-tax proceeds from the sale, estimated at approximately $875 million, to increase its high-spec jack-up fleet or expand into the ultra-deepwater drilling business.
LeTourneau remains engaged in the manufacturing of large wheel loaders for surface mining along with designing and construction of jackup rigs and shallow-water drilling vessels. Notably, it is a major manufacturer of drilling equipment for large land and offshore rigs and specialty steel products. The unit generated $815 million in revenue last year, with $556 million from its drilling products business and $259 million from mining.
The long-awaited LeTourneau divestiture is a part of Rowan’s strategy to offload its non-core business from its portfolio. The company has been trying to sell the division since three years and pointed out that it is inconsistent with its primary business of providing offshore oil and gas drilling services.
We believe this move will enable the company to monetize its non-core assets securing a highly attractive price and transform itself into a pure-play offshore driller. While the majority of Rowan’s fleet is considered to be high-end premium jackups, the company is also a proven offshore driller, with a long-term strategy in place.
Rowan’s enhanced focus on high-spec resources as well as impending tendering activities for multi-year drilling programs in the North Sea, Saudi Arabia and South-East Asia are likely to support the requirement for high-spec units. The company also anticipates improvements in utilization and day rates, which lagged last quarter, for offshore and land rigs in 2011.
Rowan currently retains a Zacks #3 Rank, which translates into a short-term Hold rating. We are also maintaining our long-term Neutral recommendation on the stock.
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