UAE-headquartered offshore drilling contractor Shelf Drilling (SHLF) has made a consolidation move, which is structured as a proposed triangular merger between its indirect subsidiary SHLF MergCo, Shelf Drilling North Sea (SDNS) as the surviving entity in the proposed business combination, and SHLF as the issuer of the merger consideration shares.

This agreement and plan of merger will enable SDNS to become a wholly-owned subsidiary of SHLF, solidifying the latter’s position on the global jack-up operators’ stage, as the former’s shareholders, representing close to 83% or more than the voting rights necessary (75%) to approve the proposed merger have irrevocably undertaken to vote in favor of the required resolutions to approve the combination at a general meeting which is expected in October 2024.

Furthermore, the directors of Shelf Drilling North Sea, who are considered independent of SHLF, have approved and recommended the proposed merger since the combination will fully consolidate the latter’s jack-up fleet, solve the former’s previously disclosed funding gap efficiently, enabling SDNS to get Shelf Drilling’s full support in the future. The combined company is anticipated to reap benefits from a simplified capital structure, while investors should benefit from a more liquid, tradeable share.Thanks to the triangular merger, the shareholders of SDNS would receive consideration for each share being canceled in the proposed combination, entailing 1.05 merger consideration shares in SHLF and a cash consideration of NOK 8.0 or $0.75 per SDNS share, representing a total consideration of NOK 25.90 (about $2.44) per SDNS share, corresponding to an equity value of about NOK 2.6 billion (over $245 million), based on a value per SHLF share of NOK 17.05 or $1.65 aligned with the closing trade price on the Oslo Stock Exchange as of September 13, 2024.

With the total cash consideration element of the SHLF-SDNS merger consideration amounting to around $30 million, this represents a premium of 13% to the market exchange ratio based on closing prices of shares, and a premium of 21% and 24% to the exchange ratios calculated using the volume weighted average share prices for both companies in the one-month and six-month periods calculated from September 13, 2024.While around 42 million new shares are forecast to be issued as consideration for the proposed merger, SHLF has an indirect shareholding in SDNS of 60%, and such existing shares are expected to continue to be the latter’s shares upon the merger, with Shelf Drilling not being entitled to the merger consideration. Once completed, existing SHLF holders will own approximately 84% and SDNS shareholders will have about 16% of shares in the combined company.Greg O’Brien, Shelf Drilling CEO, commented: “Combining Shelf Drilling North Sea into Shelf Drilling fulfills our ambition to streamline the Shelf Drilling company structure. The combination offers a pure play investment opportunity with exposure to a uniquely positioned jack up fleet and platform servicing customers across the regions where we operate. The transaction high-grades the Shelf Drilling fleet with four premium jack ups and one ultra harsh jack up and allows for Shelf Drilling to finance the USD 40m funding need in Shelf Drilling North Sea in an efficient manner.

“Moreover, we expect shareholders in the combined company to gain improved trading liquidity and better access to capital markets. This transaction further underlines our commitment to driving value for all of our stakeholders and is consistent with our focus of being a market leader in core jack-up regions globally.”A fairness opinion has been obtained from Clarksons Securities, which concludes that the merger consideration is fair from a financial point of view, thus, the board of SDNS has, subject to customary conditions, undertaken not to amend its recommendation nor solicit competing offers, as part of the merger agreement. The completion of the merger will be subject to the satisfaction of certain conditions unless these are waived or amended.

Such conditions include but are not limited to the approval by the SDNS general meeting; no breach of the warranties and representations of SDNS in the merger agreement where such breach has a material adverse effect; the parties’ due performance, in all material respects, of the merger agreement; no material adverse effect having occurred concerning SDNS; no governmental authority has acted in a way restraining the proposed merger; and SDNS not having amended or withdrawn its board recommendation or entered into an agreement for a superior offer.According to Shelf Drilling, the proposed merger is expected to be completed towards the second half of October 2024, subject to the timely fulfillment of the conditions for the business combination. While SpareBank 1 Markets is acting as financial advisor and Advokatfirmaet Thommessen and Conyers Dill & Pearman are acting as legal advisors to SHLF in connection with the merger, Advokatfirmaet Wiersholm and Appleby are acting as legal advisors to SDNS.

The business combination announcement comes shortly after Shelf Drilling secured a new set of drilling assignments for two jack-up rigs in West Africa, which follow the rise of the firm’s total contract backlog to $2.1 billion at the end of the second quarter of 2024.