Transocean Inc. and GlobalSantaFe Corp. earned a page in the innovative deals book earlier this week, carving a route around high oil sector valuations and tightening debt markets.

Transocean and GlobalSantaFe, two of the largest oil drillers, agreed on Monday to a near $18 billion deal in which their shareholders will both receive a cash payment at the time of the deal in addition to stock in the new company.

To do that, the companies combined a $15 billion leveraged recapitalization backed by a bridge loan with a stock-for-stock swap that gives no premium to shareholders -- a new deal structure that will likely turn up again, M&A experts said.

The structure can work as long as the companies have low debt levels and high cash flow, they said, so that the additional debt is not a burden to the combined company.

I would not expect this over and over and over again, but I would expect this to happen again because it was a good idea - no question - it was a good idea, said Gerald Nowak, a partner with law firm Kirkland & Ellis in Chicago.

There is no reason to believe that there are not other companies out there that couldn't lever themselves up to a responsible level and be able to sell that into the market, Nowak said.

And here is one reason other companies might follow. The news of the Transocean-GlobalSanteFe deal pushed shares of both companies around 5 percent higher on the day of announcement as investors, who normally might not be so thrilled with a no-premium deal, rallied around the cash payment.

This looks to be a situation where they looked at a range of different transaction structures and this is the one that gave them, and gave their combined shareholders, the best return, said Frank Aquila, a New York-based partner in the mergers and acquisitions group of law firm Sullivan and Cromwell.

Will you see something like this again? Possibly, because I have to believe there are other companies in similar circumstances, Aquila said.

The two companies turned to a no-premium deal in part because the oil drillers have had record high valuations this year, making a cash deal difficult. GlobalSantaFe shares for instance are up 31 percent this year and are up 60 percent since the end of 2005.


Companies have used special dividends to try to win over shareholders in the past.

CVS/Caremark Corp., for instance, paid out a special dividend of $7.50 per share to Caremark shareholders to win support for their $24 billion stock-for-stock offer - which offered no premium to Caremark's shareholders - away from a rival offer from Express Scripts Inc.

And two years ago, Procter & Gamble crafted a $57 billion deal to buy Gillette Co. that included a $20.1 billion stock buy back over the following 18 months, effectively handing cash back to its shareholders.

But using a recapitalization - in this case funded by a bridge loan with a one-year term from the two companies' bankers - to pay out a cash dividend at the same time as conducting a stock-for-stock transaction, is new ground.

The unusual deal comes at a time when the debt markets are tightening and concerns about funding mergers and acquisitions - which are in the middle of yet another record year - have led some to foresee a drop in large deals.

The tougher debt markets may explain why the banks turned to a bridge loan - or a short-term bank loan - rather than the public markets to initially raise the cash. The company is expected to issue high-yield debt to pay down that loan, but having the loaned cash on hand gives them more control over when.

Nowak at Kirkland & Ellis said one way around the pricier, but immediate gratification of a bridge loan, might have been for the banks to promise a dividend down the road once the debt is sold. The next deal could absolutely be done that way, he said.

Another result of the tougher debt markets may be to make a no-premium deal a less risky bet because the difficulties of financing could keep other higher bidders at bay. TXU Corp., for example, said in a proxy filing on Wednesday that it doubted another bidder could produce a rival bid to its record $38 billion leveraged buyout because of changes in financing.

I think it's a function of the climate in the sense that some people would be concerned that if they tried to do a merger of equals or a no-premium deal that someone would come along and offer a premium, said Morton Pierce, chairman of the mergers and acquisitions group at law firm Dewey Ballantine in New York.