Transocean Ltd., the world’s largest offshore rig contractor, will boost its dividend and cut costs as part of an agreement with Carl Icahn, months after winning a shareholder battle with the billionaire investor.
Transocean shareholders, who rejected Icahn’s proposed $4- a-share dividend in May, will have the chance to vote on a $3 payout next year, up from the current $2.24 level, according to a statement from the Vernier, Switzerland-based company today.
If approved, the dividend payment would total $1.08 billion, based on the 360.6 million Transocean shares now outstanding, according to data compiled by Bloomberg.
Icahn, Transocean’s third-largest shareholder, began pushing for changes at the company in January, saying it had been involved in “ill-advised mergers, employed unsuccessful development strategies and squandered the substantial cash flow.” Shareholders in May largely sided with the company, rejecting the higher dividend and two of Icahn’s three board nominees. As part of today’s agreement, another Icahn nominee, Vincent Intrieri, will be part of the company’s proposed slate for a smaller 11-member board next year.
“After fighting Icahn tooth and nail this spring and largely winning, Transocean has now curiously yielded to additional demands,” Scott Gruber, an analyst at Sanford C. Bernstein & Co., wrote today in a note to investors. “Clearly the company feared another battle in 2014.”
The proxy fight at Transocean was one of several instances this year of activists pushing for changes as investors seek more returns from booming natural gas output and higher oil prices. Icahn, who said last month he may seek board seats at Canada’s Talisman Energy Inc., is ranked 29th on the Bloomberg Billionaires Index of the world’s richest people, with a net worth of $23.3 billion.
Transocean climbed 3.1 percent to $55.09 at 9:52 a.m. in New York. The shares, which have gained 24 percent this year, have 17 buy, 21 hold and five sell ratings from analysts.
The Icahn agreement includes a commitment to increase margins by $800 million through cost cutting and increased efficiency.
Transocean also said it will form a master-limited partnership, which will provide “additional financial flexibility.” An initial public offering of a minority interest is anticipated by mid-2014, the company said.
Transocean has said before that it was studying the idea of forming a so-called MLP. Chief Financial Officer Esa Ikaeheimonen told analysts and investors on a conference call last week that more details would be released by the company’s analyst day on Nov. 21. The company, which has said in the past that rigs with long-term contracts and predictable cash flows might go into an MLP, declined today to elaborate on what the partnership may look like.
“Transocean is now on the road to realize its great potential,” Icahn said in the statement.
Transocean’s stock had lost as much as half its value after an explosion at the company’s Deepwater Horizon drilling rig in the Gulf of Mexico led to the worst offshore oil spill in U.S. history. The incident at the BP Plc-operated rig in April 2010 resulted in the deaths of 11 workers. Transocean said in January it would pay $1.4 billion in penalties for its role in the disaster.
The dividend that Transocean and Icahn will support at the company’s 2014 annual general meeting will come from additional paid-in capital, according to the statement. The company had halted its dividend in 2012, saying it needed to defend its credit rating and maintain a “strong, flexible balance sheet.”
The rig contractor will balance its spending by seeking to save about $200 million from a “shore-based initiative” by the end of 2014, while continuing to renew its fleet with high- return, premium drilling rigs, Transocean said.
The collaboration with Icahn may “imply greater financial discipline going forward,” Matthew D. Conlan, a New York-based analyst with Wells Fargo & Co., said in a note to clients today.