O.C.’s Varco Announces Merger

Seeking to solidify its position in a volatile industry, Varco International Inc. in Orange said Wednesday it agreed to merge with another oil field equipment company, Tuboscope Inc., in a stock transaction valued at $834 million.

Though analysts say the proposed combination is a natural marriage, the deal values Varco stock at $2.78 a share below its Wednesday closing price of $15.56.

The discount, say analysts, reflects the unpredictability of the industry amid slumping crude oil prices, which hit a 12-year low in December.

“There is about a discount of 18%, but that’s a reflection of this business,” Sanchez said. “The exchange ratio had been agreed to for some period of time, and it was designed to be a true merger of equals.”

Houston-based Tuboscope said Wednesday it will issue 0.7125 of a share of its stock for each outstanding Varco share--the equivalent of $12.78 per share. Although the stock has moved up recently, Varco shares have averaged $12.55 over the last month.

The combined company will be called Varco International Inc. George Boyadjieff, Varco’s chairman and chief executive, will retain his titles with the new company.

The companies said the agreement will allow them to attract more customers by offering a broader product line. Tuboscope maintains and inspects oil and natural gas tubes and pipelines. Varco makes drilling equipment and rig instrumentation.

The merger, expected to be completed during the second quarter, is subject to shareholder and regulatory approvals. Once closed, officials say, shares of the combined company will trade on the New York Stock Exchange under the symbol VRC.

The combined firm plans to maintain dual headquarters in Houston and Orange, officials said in a statement. Based on Wednesday’s closing stock prices, the combined company would have a market capitalization of about $1.8 billion.

Officials say that minimal layoffs are expected at both companies. The companies declined to elaborate.

“This is a cyclical and volatile industry, and Varco--which is in very good [financial] shape--has felt it in the past couple years,” said Bill Sanchez, a financial analyst who tracks the industry for the investment firm Howard, Weil, Labouisse Friedrichs in Houston.

Hard Times for Varco

Indeed, the merger comes on the heels of a tough year for Varco, as the lingering effect of lower crude prices reduced demand for its products. Last summer, the company fired about 740 workers--25% of its work force.

Most of the jobs were manufacturing-related, though some administrative positions also were cut, officials said at the time.

Of the 740 workers who lost their jobs, 180 were based in Orange County, where about 560 employees remain. At its peak in August 1998, Varco had 3,200 employees worldwide, officials said.

Varco reported earlier that net income fell 39% last year to $37 million while revenue fell 20% to $592.8 million.

Tuboscope lost $7.2 million last year after posting a profit of $41.9 million the previous year. Revenues fell 32% to $385.5 million.

For several months Tuboscope has been searching for merger or acquisition opportunities. In June, it said it would buy rival Newpark Resources Inc., which disposes of oil field waste, for $638 million in stock. But by November, the Texas firm called off the deal after it couldn’t arrange favorable financing.

The agreement was announced after the close of U.S. markets. Varco’s stock rose $1 a share to $15.56 amid heavy trading. Shares of Tuboscope rose 94 cents to $17.94, also amid heavy trading. Both stocks trade on the New York Stock Exchange.

Shareholders of each corporation will have an equal stake in the new company, which had combined revenue of about $1 billion last year and about 5,300 employees worldwide as of Dec. 31. The deal is expected to be structured as a tax-free merger of equals and, say officials, would result in modest cost savings.

John Lauletta, president and CEO of Tuboscope, will become president and chief operating officer of the new firm. Joseph Winkler, chief financial officer of Tuboscope, will keep his position.

The 10-member board of the combined company includes five seats each from Varco and Tuboscope. L.E. Simmons, former chairman of Tuboscope, will join the board as a nonexecutive director.

Tuboscope was advised by Credit Suisse First Boston Corp., which brought the two companies together. Varco was advised by J.P. Morgan & Co. Inc.

Bloomberg News contributed to this report.