Trouble Brewing in Oil Patch Merger? (SII, WHQ)

On June 3, 2008, Smith International (NYSE:SII) and W-H Energy Services (NYSE:WHQ) entered into a definitive merger agreement that would have Smith paying $56.10 in cash and 0.48 common share for each W-H share outstanding. At the time, the transaction valued each W-H share at $93.55, for a total value of about $3.2 billion. Analysts looked on the deal as a good match.

Smith kicked off the exchange offer on June 24th, and set the offer’sexpiration for midnight on July 22, 2008. W-H’s board unanimouslyrecommended that shareholders accept the offer. By July 18th, Smith hadreceived tenders for just over 2 million shares of W-H’s 30 millionoutstanding shares. So the tender offer was extended until August 4th.

As of August 8th, a total of 8.2 million W-H shares had been tendered,and today Smith extended the tender date to August 18th, to coincidewith the expected Hart-Scott-Rodino clearance. Smith withdrew andre-submitted its HSR filings on July 18th, following "consultation"with the US Department of Justice Anti-Trust Division.

In today’s press release, Smith noted that it "remains very confidentthat all required regulatory approvals" will be forthcoming. But thecompany is also appealing to W-H shareholders to get moving on thosetenders: "Smith also announced that W-H shareholders may tender theirshares pursuant to a guaranteed delivery option if such shareholder’sshare certificates are not immediately available or cannot otherwise bedelivered by the expiration date."

Is something amiss with the anti-trust filing, are W-H shareholdersignoring the unanimous recommendation of the W-H board, or have W-Hshareholders misplaced their share certificates? Virtually all of W-H’sstock is held by institutional investors who are probably holding outfor a better offer. W-H shares closed at $90.59 yesterday, so the$93.55 offer is not much of a premium from here. Both W-H and Smith are tradingdown this morning, Smith by more than $2.50.

This deal looks like it’s going to cost more than Smith originally planned. Either that, or W-H shareholders will sit tight.

Paul Ausick
August 8, 2008