After fighting Carl Icahn tooth and nail last spring, Transocean Ltd. has capitulated. In early November, the company announced it had entered an agreement with Icahn to pay out an additional $3 per share dividend—up from $2.24—and add another of Icahn's men to the board of directors.

In return, Icahn agreed to vote in favor of the board's slate of director nominees and “certain other proposals” Transocean's board may recommend at the 2014 annual general meeting. The number of seats on the board will be reduced to 11 from 14.

The agreement means that Transocean will avoid a continuing proxy battle. Icahn, using weak Transocean share performance as leverage, appears to have won the war, says Scott Gruber, an analyst with Bernstein Research.

Icahn and the company have squared off for months, with Transocean accusing Icahn of using superficial analysis that was misleading or false to make his arguments.

“We believe he has failed to invest the requisite time and effort necessary to fully understand our business, our industry as a whole or even the manner in which we generate operational and financial returns,” the company said in a statement.

In May, Transocean celebrated the fact that 75% of votes cast for a dividend supported its position, “soundly rejecting the Icahn Group's proposal for an annual dividend of $4 per share.”

However, Transocean eventually buckled.

“We are pleased that Mr. Icahn recognizes the changes currently under way at Transocean and the continued focus of the board and management on creating shareholder value,” said Steven L. Newman, president and chief executive officer, in November.

“I am especially happy about the commitment to pursue an MLP [master limited partnership], raise the dividend and increase margins by $800 million through cost-cutting and increased efficiency,” Icahn said at the time. “I believe that Transocean is now on the road to realize its great potential. We look forward to continued collaboration with the board of directors and management.”

Transocean, which has its US headquarters in Houston, will pursue an MLP-type yield vehicle that could complement its capital structure by providing additional financial flexibility and enhance the execution of its asset strategy. The initial public offering of an MLP could be completed near mid-2014 if market conditions and other factors are appropriate.

Transocean also announced a target for incremental margin improvement of $500 million by the end of 2015 through operational improvements and additional cost reductions.

Gruber says the catalysts that could move Transocean's value higher are effectively used up for now. The company will soon exhaust cost-streamlining, the formation of an MLP and dividend enhancement.

After an apparent win in the spring, “Transocean has now curiously yielded to additional demands,” Gruber says. “This likely reflects poor share-price performance post the May vote, which supported Icahn's position that the company's original strategy would produce inferior shareholder returns and thereby provided Icahn with much greater negotiating leverage.”

Gruber says the company clearly feared another battle in 2014.

“We applaud the dividend increase as the previous—albeit diminishing—focus on debt reduction was excessive, and we believe the increase will be approved,” Gruber says.

The company expects to realize about $200 million in savings related to its shore-based initiative by the end of 2014. As a key element of its balanced capital allocation strategy, Transocean will continue to renew its fleet by investing in high-return, premium drilling rigs, both floaters and jackups.

—Darren Barbee