The $3.5-billion merger of Petroleum Geo-Services ASA (NYSE: PGO) and Veritas DGC Inc. (NYSE: VTS) will create the second-largest geophysical services company, behind WesternGeco. The move, which helps consolidate the troubled seismic market further, brings together two companies with historically different strategies, Wall Street oil-service analysts say. "It came as a surprise," says Jim Wicklund, who covers Veritas for Banc of America Securities LLC in Houston. "The companies have competed against each other and known each other for a very long time. And it would appear from the way the two companies were run, they had very little in common in terms of philosophy." Financially, PGS has been more comfortable with debt than Veritas. Oslo-based PGS has more than $2 billion in debt, whereas Houston-based Veritas has $135 million. Operationally, PGS has expanded its reach to include floating production services in addition to seismic contracting. Veritas has remained focus on seismic services. And, even in terms of seismic strategy, there are differences. PGS' capital constraints have led the company to focus more on contract work, whereas Veritas is more involved in multiclient work, Wicklund adds. But despite the differences, the case for consolidation is strong. There is a consensus among seismic players that there is little room for organic growth within the industry during the next several years, Wicklund says. "3-D technology is now 10 years old, and there doesn't appear to be any commercially feasible breakthroughs on the horizon. And so the only way for one company to grow is at the expense of a competitor. Veritas, I think, did this because it saw no other way to grow." Joe Agular with Johnson Rice & Co. in New Orleans says the merger is a good move despite the differences in company styles. "I think the benefits of the consolidation and the savings, in an industry which has needed it recently, will outweigh any of the concerns that may arise from the deal." Under the agreement, Veritas and PGS will become wholly owned subsidiaries of a new, to-be-named holding company incorporated in the Cayman Islands. The new company will have an equity market capitalization of approximately $1.0 billion, a total enterprise value of approximately $3.5 billion and annual revenues of about $1.5 billion. The transaction is anticipated to be immediately accretive to the combined company's earnings and cash flow per share. The lower debt on Veritas' balance sheet should help the combined entity raise capital, says Wicklund. "The management of [PGS] had strained its credibility with Wall Street and had hampered its ability to raise capital. The seismic business needs good access to capital, and has not always had it." Executives indicated that reducing the current debt-to-capital ratio of 49% would be a high priority. PGS chairman Reidar Michaelsen will become chairman and co-chief executive officer of the combined company, with primary responsibility for the production business, which will represent one-third of operations. Veritas chairman Dave Robson will become vice chairman and co-CEO, with primary responsibility for the geophysical business, which will be two-thirds of operations. Its board of directors will have 10 members, four from each of the two companies, including Robson and Michaelsen, and two new, unaffiliated directors. It will be based in Houston and maintain a significant operating presence in Norway. PGS shareholders will receive 0.47 share of the new company's per share of PGS. Veritas shareholders will receive one share per share of Veritas. Based on the stocks' closing prices Nov. 23, 2001, the deal is worth $7.64 per PGS share, or a 44% premium. The transaction is expected to be tax-free to Veritas shareholders and taxable to PGS shareholders. However, PGS expects to apply for tax-exempt treatment for Norwegian shareholders of PGS. PGS shareholders will own approximately 60% of the new company. Merrill Lynch & Co. and ABG Sundal Collier & Co. advised PGS; Evercore Partners Inc. advised Veritas. -Jodi Wetuski

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