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Grant Prideco Inc. will buy Reed-Hycalog from Schlumberger Ltd. for approximately $350 million in cash and stock, adding drillbit technology, manufacturing, sales and service to its operations. "We believe this is a great product-line extension," says Grant Prideco president and chief executive officer Michael McShane. "There are a number of overlapping marketing synergies in designing drillstring and bits that we think we can realize in the long term." Geoff Kieburtz, analyst for Salomon Smith Barney Inc., says, "Schlumberger had been shopping this business for some time in an effort to shed noncore businesses and reduce debt. For Grant, the transaction represents a logical product diversification." Robert Ford of Sanders Morris Harris Group says, "It's an excellent acquisition. Management intends to run Reed-Hycalog as a stand-alone business, in contrast to Schlumberger's focus on geographic entities instead of product lines. In our opinion, this will enable Reed to maximize its full potential." Reed-Hycalog has slightly less than 20% total market share in its business, making it the world's third-largest drillbit manufacturer behind Baker Hughes Inc. and Smith International Inc., he added. Its revenue is split between the U.S. and abroad. Roller-cone bits generate 60% of its sales, while fixed-head units produce the rest. James K. Wicklund of Banc of America Securities LLC says, "I think it's a killer deal. It's accretive, it's strategically complementary and the difference in what Reed-Hycalog is to Grant Prideco lets it optimize the result." Specifically, Grant Prideco will pay Schlumberger $255 million in cash and 9,731,834 shares of common stock. It will assume approximately $5 million of liabilities and acquire approximately $120 million of working capital. To finance the cash portion, the company is replacing its existing bank line with a $265-million credit revolver, and it has bridge facilities committed until it raises $150 million in the public and private bond markets. Assuming it has to issue that much debt, the company's ratio of debt to total capital would climb from 30% to about 45%. But Grant Prideco expects it will be able to reduce the ratio to 30% in about 18 months, strictly from cash flow.
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