National Oilwell Varco to buy Grant Prideco

By Anna Driver and Matt Daily

HOUSTON/NEW YORK (Reuters) - Oil and gas service company National Oilwell Varco Inc <NOV.N> said on Monday it would buy peer Grant Prideco Inc <GRP.N> for about $7 billion to broaden its product range for customers in fast-growing international markets.

The takeover creates a leader in the production of equipment used to build drilling rigs and the pipes used in oil and gas wells, a business expected to post strong growth on the back of oil prices that have hovered near $90 per barrel.

"Overall, I think the business model is such that we're going to be able to provide a wider array of products to our international customer base," Pete Miller, National Oilwell's chief executive officer, said on a call with analysts.

The deal values Grant Prideco at $54 per share, a nearly 14 percent premium to its Friday closing price. National Oilwell will pay $23.20 in cash and 0.4498 of its shares for each Grant Prideco share.

Although the deal won praise from analysts as a good strategic fit, shares of National Oilwell tumbled as much as 11 percent, partly on worry about weakness in Grant Prideco's North American business.

"With regard to 2008, I think the outlook for the North American drill pipe sales is opaque at best," said Bill Herbert, analyst with Simmons & Co. International. Grant Prideco's heavy exposure to that market could "suppress National Oilwell's earnings multiple going forward," he added.

The deal does make sense for the long term, Herbert said.

Based on National Oilwell's closing stock price of $77.37 on Friday, the deal was worth $7.37 billion. But the decline in the shares on Monday reduced the value of the acquisition.

The deal, which has been unanimously approved by both companies' boards of directors, will give National Oilwell 86 percent of the combined company. It will have a market value of about $32 billion, 40,000 employees, and operate in 49 countries.

The purchase is expected to add to earnings and cash flow in 2008, assuming a full-year rate of cost savings of $40 million from overhead, said National Oilwell, which will finance the purchase with cash on hand and debt.

The deal must be approved by regulators and Grant Prideco shareholders. A shareholder vote is likely to take place late in the first quarter of 2008 or early in the second quarter.

Last month, offshore drilling contractor Transocean Inc <RIG.N> bought smaller rival GlobalSanteFe Corp for $18 billion in a bid to capitalize on the robust demand for the high-tech equipment needed to tap underwater resources.

National Oilwell shares were off 9 percent, or $7.27, to $70.10 near midday on the New York Stock Exchange, while Grant Prideco was up 14 percent, or $6.54, to $54.00, also on the NYSE.

(Editing by Mark Porter and John Wallace)