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Transocean, Icahn Settle Terms, Shares Rise

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The proxy battle between the incumbent management and activist investor Carl Icahn for the control of offshore drilling giant Transocean Ltd. (RIG - Free Report) came to an end on Nov 11, with the former partly yielding to the terms of Icahn.

The board has agreed to re-elect Samuel Merksamer and appoint Vincent Intrieri at the 2014 annual general meeting. Both Merksamer and Intrieri are associated with the Icahn group. With two seats in the Icahn-proposed smaller board (11 against the previous 14) that management has agreed to, the billionaire investor seems to have firmly secured his place in the Switzerland-based company.

Transocean also disclosed the annualized dividend payment of $3 per share – payable 6 months from now – down by a dollar from Icahn’s demand. But with control over almost 6% shares, Icahn should not be too disappointed as the hike would give his dividend gains a push in the right direction. Moreover, the move would spread investor cheer as the new dividend not only reflects an almost 34% hike from $2.24 paid previously, but would also be the first payment since 2011.
Among other changes, Transocean also expects to improve operating margin by $800 million by the end of 2015, through improved efficiency and cost-cutting measures.

A key attribute of the announcement is Transocean’s decision to spin-off a master limited partnership (MLP). This is a common move undertaken by several energy companies to increase their financial flexibility and enjoy tax incentives. The initial public offering (IPO) for the MLP is expected to take place in mid 2014. The proceeds from the minority interest to be sold during the IPO should help Transocean to pay the hefty dividend.

The long-drawn battle has finally been settled with both parties emerging winners. Most of Icahn’s demands were met and the company’s shares grew $1.92 (or 3.6%) to settle at $55.37 when the market closed yesterday on the promised shareholder value enhancement.

Transocean currently holds a Zacks Rank #3 (Hold), implying that it is expected to perform in line with the broader U.S. equity market over the next one to three months.  

Meanwhile, one can consider other oil and gas drilling service providers like Pacific Drilling S.A. and Tesco Corp. which currently sport a Zacks Rank #1 (Strong Buy) or Helmerich & Payne, Inc. (HP - Free Report) which holds a Zacks Rank #2 (Buy).

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