Smith’s Reorganization Plan Tentatively Settled

Smith International Inc. of Newport Beach, once one of the world’s largest oil services companies, said Monday that it has reached a tentative settlement in its 16-month bankruptcy reorganization and expects to resume normal business operations by the end of the year.

The plan, scheduled to be filed in U.S. District Court in Los Angeles today, allows the company to erase a total of $415.5 million in debt with a combination of $146 million in cash payments, $155 million in long-term notes and as much as $115.5 million of new stock and warrants. Included in the stock is $50 million worth of preferred stock with an eight-year life span and a cumulative dividend rate of 17%.

A key element of the plan is payment of an earlier agreed upon $95 million to settle a $205-million patent infringement lawsuit Smith lost in early 1986 to its archrival, Hughes Tool Co., now known as Baker Hughes. The plan calls for Smith to pay $85 million in cash by the end of the year and to issue Baker Hughes a $10-million 2 1/2-year note.

The settlement plan should end the uncertainity and acute financial distress Smith has been operating under since being hit with the twin calamities of the patent infringement penalty and a collapsing worldwide oil market.

Although Smith’s performance has rebounded with the oil industry in recent months, the company lost a total of more than $275 million at the depth of the oil depression from 1983 to 1986. The losses so depleted the company’s resources that it was forced to seek bankruptcy protection in early 1986 when it was ordered to pay the $205 million judgment to Hughes.

The reorganization plan, which would leave Smith with about $30 million in cash with which to rebuild its operations, generally was hailed Monday as an equitable disposition of the competing claims. Smith officials said the plan is designed to repay creditors 100% of what they are owed.

“Everybody had to give up a little bit. But everyone is happy,” said Loren Carroll, Smith’s chief financial officer. “We’ve got a new company coming out of this thing.”

The settlement is subject to the approval of the bankruptcy court in Los Angeles, which has scheduled hearings on the plan for Aug. 24. Final confirmation has been set for Nov. 12.

Despite the upbeat tone of the news, Smith’s stock closed Monday on the New York Stock Exchange at $9.25 per share, down 62 1/2 cents for the day on light trading. James L. Carroll, an oil services analyst in the New York offices of Paine-Webber Inc., attributed the decline to stock-hyping speculation in recent weeks that the company would emerge from bankruptcy with an announcement that it intended to merge with or be acquired by a competitor. Smith officials said they could not comment on such speculation.

“We have just won a settlement that allows us to operate in the future, and that is what we are going to do,” said Loren Carroll, who is not related to the Paine-Webber analyst.

Jim Woods, president and chief executive of Baker Hughes in Houston, said his company is pleased with the deal, although it calls for Baker Hughes to accept less than half of the original $205-million judgment.

“We are highly confident we will get our money by the end of the year,” Woods said.

Jeff Chanin, a managing director of Drexel Burnham Lambert Inc. in Los Angeles and chairman of Smith’s equity shareholders committee, said the shareholders were happy that a portion of the payments spelled out in the reorganization plan will be made with new stock and warrants to purchase additional shares.

“If you look at other Chapter 11 filings of similar size, the retained value of these shareholders is higher than most,” Chanin said. “Shareholders will have a chance to recoup losses. We have great faith in the stock market.”

Seven-Year Warrants

A portion of the plan calls for existing Smith shareholders to receive seven-year warrants to purchase up to 4.8 million shares of common stock at $15 per share.

Not including Baker Hughes, Smith’s unsecured creditors, whose claims totaled $275 million, are scheduled to receive a repayment package that includes $30 million in cash, $145 million in interest-bearing notes, the $50 million of eight-year preferred stock, $54.5 million in common stock and $10 million in warrants.

Although participants were pleased with the agreement, analysts cautioned that it does not assure Smith smooth sailing in the years ahead. Smith, which had 14,000 employees worldwide at its peak in 1981, will emerge from the Chapter 11 bankruptcy reorganization as a much smaller operation, with only about 3,100 employees.

“They are by no means out of the woods,” said PaineWebber’s Carroll.

Carroll said that while Smith was struggling with its bankruptcy proceeding, Baker Hughes--its primary competitor--was devoting its attention to its slick new ATS drill bit, a machine designed to reduce the cost of drilling for oil by 30% to 40%.

“Smith has got to come up with a competitive answer,” Carroll said.

SMITH INTERNATIONAL AT A GLANCE Common shares--22.7 million.

Number of shareholders--4,300.

Number of subsidiaries--approximately 50.

Number of employees--approximately 3,100.

Smith International Inc.’s breakdown of proposed payments to creditors under its reorganization plan: CASH: $146 MILLION NOTES: $155 MILLION STOCK: $104.5 MILLION WARRANTS: $10 MILLION