NEW YORK, Aug. 21, 2017 /PRNewswire/ -- Arrowgrass Capital
Partners (US) LP today sent a letter and a slide presentation to
the Board of Directors of Ensco plc (NYSE: ESV) and Ensco
shareholders regarding Ensco's proposed merger with Atwood
Oceanics, Inc. in response to Ensco's August
14 press release and presentation containing "An Overview of
Strategic Rationale and Value."
The full text of the letter is below and the slide presentation
has been filed with the Securities Exchange Commission (SEC) and is
available on the SEC's website at
https://www.sec.gov/Archives/edgar/data/314808/000091412117001095/ar20170821-px14a6g.htm
_______________________________
An Open Letter to The Ensco Board of Directors and Fellow Ensco
Shareholders
Dear Fellow Shareholders,
On August 14, 2017, Ensco issued a
press release and presentation containing "An Overview of Strategic
Rationale and Value" of the proposed Atwood transaction. Unfortunately, as the
company continues to defend this misguided transaction, Ensco's
share price continues to lag behind that of its peers, with the
cumulative underperformance since the deal's announcement at
~16-27% (36% in absolute terms). Clearly shareholders do not see
either the rationale or the value in this acquisition.
At this time, we own 14.6 million Ensco shares and are among the
largest shareholders of Ensco. After reading Ensco's new
presentation, we are more confident than ever that this expensive,
poorly timed, and risky transaction is the wrong path for Ensco. We
urge shareholders to vote down this unquestionably
value-destructive deal.
Below we address the salient points made by Ensco in its
August 14th presentation:
1) Ensco claims that Atwood's assets are "unique". They are
not.
There is absolutely nothing "unique" about
Atwood's assets. In fact, it is so
difficult to label Atwood's assets
as "unique" that in its latest presentation Ensco had to redefine
what it classifies as a "Best-in-Class" asset (compared to their
July 2017 and May 2017 presentations). It is very clear that
this inconsistency is an attempt to make Atwood's assets seem far more "special" than
they truly are.
It is widely known that there is a very long list of high
quality assets in distress (as detailed in our August 3, 2017 presentation). Moreover,
Atwood's assets alleged
"uniqueness" is a diversion from the far more relevant question of
how much they are really worth. Whatever one may think about the
quality of Atwood's drillships,
Ensco is massively overpaying for them.
2) Ensco claims that this is the "right time" to act, but
issuing shares at multi-decade lows while adding leverage is
demonstrably value destructive in both bullish and bearish
scenarios.
This is the worst time in decades to issue Ensco
stock both in absolute and relative terms. Ensco shares are
currently trading at their lowest absolute level since the
mid-1990s. In relative terms, the proposed transaction crystalizes
the most disadvantageous exchange ratio of Ensco stock relative to
Atwood in over 17 years. The
proposed transaction would increase Ensco's share count by 45% at
very depressed levels. It is insincere to describe the timing of
this all-stock transaction as "right".
Management points to some positive market data points to justify
the timing of this deal. While we are also encouraged by a pickup
in contracting activity, this is an all-stock transaction. A vote
for the proposed deal is not only a vote to buy Atwood, but also a vote to give away Ensco
shares (and upside) and to bail out Atwood shareholders by issuing shares at their
lowest levels in decades. Ensco's timing discussion also
fails to address the perilous financial trajectory of Atwood itself, which is particularly important
for negotiating leverage and relative valuation considerations. The
question of "Why Now?" is more pressing than ever.
3) Even Ensco struggles to demonstrate accretion. Their own
forecasts point to ~10-15% cash flow dilution even after 5 years of
solid recovery.
Ensco claims that the transaction is "~10%
accretive" to shareholders under Case B described in the Form S-4.
Even if the ~10% was correct (we believe it is not), this mediocre
accretion is completely inadequate to compensate for the increased
risk. As detailed in our prior presentation, the generous
assumptions used to arrive at this "~10%" accretion suggest that it
was very difficult for Ensco and its financial advisor to conclude
there was any value creation at all.
This "lose-lose" transaction is clearly dilutive irrespective of
one's view on the cycle. In fact, Ensco's own cash flow forecasts
are dilutive by 10-15% even after 5 years of recovery (Cases A and
B). The deal would be even worse in a lower for longer environment
as a more prolonged period of higher cash burn would compound the
negative leveraging impact of this transaction. By issuing shares
at the bottom while adding leverage to the balance sheet, the
proposed transaction manages to both curtail upside and materially
increase risk.
4) "Implied Per-Floater Valuation" also fails to justify the
transaction.
In our opinion, Ensco used a methodology to
calculate the "implied value per rig" that significantly
understates the price being paid. We think the real value for each
of Atwood's 4 drillships is
~$300 million versus Ensco's headline
number of $222 million. Much more
importantly, however, is the fact that Ensco is buying these assets
for stock. Therefore, the most relevant question is how does the
price paid compare to the valuation at which Ensco is issuing
shares.
In our opinion, a "per-floater" valuation is intrinsically
flawed and misleading due to the distressed and oversupplied state
of the industry. Nevertheless, for illustrative purposes, we
calculated the "Implied Value per Best-in-Class" rig in a
consistent way for both Atwood and
Ensco. The conclusion is that Ensco is selling shares with an
"Implied Value per Best-in-Class" rig of ~$200 million to pay ~ $300 million for each of Atwood's "Best-in-Class" rigs. There is no
"compelling value" in buying a supposedly "cheap" asset by issuing
even cheaper shares to pay for it.
5) "Alternative Analysis" only underscores the lack of
reasonable arguments.
Page 9 of Ensco's latest presentation
had some particularly problematic analyses. Essentially, Ensco
compared the future value of Atwood (in a recovery) to the present value of
Ensco (at depressed conditions). Ensco's conclusion was that
"recovery-Atwood" would represent
a high percentage of "depressed-Ensco's" current market value (they
quoted "more than 90%"). Only by taking this novel approach
(perhaps one not seen before in the history of corporate finance)
could Ensco show that this transaction has "substantial upside".
Clearly, this apples and oranges comparison makes absolutely no
sense as it compares the value of two companies in completely
different market environments. Ironically, to calculate this
supposed "upside", Ensco is using a reference price for itself of
August 9, 2017, after this misguided
transaction destroyed 32% of the company's market value. By this
logic, if Ensco shares decline another 50% the Atwood transaction would look even more
"compelling".
6) "Right is right even if no one is doing it; wrong is wrong
even if everyone is doing it."
Ensco also pointed out the
fact that it participated in a "competitive process". The rationale
for a transaction should stand on its own and a deal cannot be
justified only because someone else had a similarly bad idea. As we
have covered extensively, Ensco has been unable to credibly justify
the merits of this transaction using myriad methodologies (Form S-4
included "10-yr DCF", "Useful Life DCF", "Discounted equity value
analysis", "Multiples", not to mention the complete absence of
Earnings, Cash Flow or EBTIDA accretion).
On August 15, 2017, Transocean
agreed to acquire SongaOffshore. The market's initial reaction was
negative, with Transocean down ~10% since the announcement. As we
mentioned in our original letter, we are supporters of smart
consolidation. However, and without going into the merits of
another transaction, the market is clearly questioning the timing
and terms of recent deals.
We continue to think that the best course of action for Ensco is
to use the staying power of its superior balance sheet to await
compelling opportunities that will emerge among the long list of
distressed assets in the market.
The sudden change in Ensco's definition of "Best-in-Class"
assets and the new "alternative" methodologies used to try to
defend this transaction are clear attempts to explain the
unexplainable. In fact, they prove how difficult it is for the
company to justify this deal. The reality is that buying
Atwood on these terms is visibly
value destructive regardless of whether one has a positive or
negative view of the market as it manages to both limit upside (by
issuing shares at the bottom) and add risk (by taking on more
leverage).
Despite the company's repeated attempts to rationalize this
deal, the market is clearly seeing the damage that this proposed
transaction brings to Ensco shareholders, resulting in Ensco's
severe underperformance relative to peers since deal
announcement.
We urge fellow shareholders to make their views known and to
vote against this misguided deal.
Regards,
Michael Edwards - Partner and US
Head
Daniel Henriques - Head of
Energy
Arrowgrass Capital Partners
_________________________________________________________
Arrowgrass is not soliciting proxies relating to the Ensco or
Atwood special shareholder
meetings and does not have the authority to vote your proxy.
Arrowgrass is not asking for your proxy card and cannot accept your
proxy card. Please DO NOT send us your proxy card.
About Arrowgrass
Arrowgrass Capital Partners is a London headquartered alternative asset manager
that was founded in February 2008. As
of August 1, 2017, the firm managed
approximately $6.2 billion and had
144 employees across its New York
and London offices.
Arrowgrass Capital Partners LLP is FCA regulated and both
Arrowgrass Capital Partners LLP and Arrowgrass Capital Partners
(US) LP (together, "Arrowgrass") are registered with the SEC and
CFTC.
Press Contact
Please address press inquiries to Arrowgrass spokesperson
Nick Lord at +44 7501 271 083
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SOURCE Arrowgrass Capital Partners (US) LP