Varco International to Buy 2 Units From Baker Hughes in Deal Worth $23 Million

Varco International has agreed to acquire two units of Houston-based Baker Hughes International in exchange for a package of Varco stock, options and notes valued at $23 million. Although no cash is involved in the deal, Varco has agreed to pay Baker Hughes up to $15 million in royalties over an eight-year period.

The units acquired were BJ Machinery, which manufactures drilling equipment, and Technical Drilling Tool, which is a marketing and sales arm of Hughes Tool Company, a subsidiary of Baker Hughes. Both units are based in Houston, although BJ Machinery’s manufacturing facilities are located in Holland.

The acquisitions should enable Varco to expand its market in the automated drilling and pipe handling market, according to analysts.

Varco, based in Orange, has been hard hit by the downturn in the oil business. Last year the company lost $6 million on sales of $37.8 million, although the company did earn $99,000 in the fourth quarter, its first profitable quarter in nearly two years.

Despite its troubles, Varco has an established niche in two sophisticated products: the top drill system and an automated pipe handling machine. The products are mostly employed to upgrade existing offshore rigs, and analysts said the acquisitions from Baker Hughes should enable the company to strengthen that niche.

The two Baker Hughes divisions posted combined operating sales of $21 million and were moderately profitable in 1987, according to Eric L. Mattson, treasurer for Baker Hughes.

Under the terms of the agreement, Baker Hughes will receive 3 million shares of Varco common stock, worth $16.1 million at current prices, or 12% of the outstanding shares. Baker Hughes also has a three-year option to purchase an additional 1 million shares at $6 a share, which could increase its holdings to 15%. Varco stock closed on Monday at $5.375.

As part of the deal, Baker Hughes has also extended Varco an eight-year loan for $4.375 million, with an annual interest rate of 12.5%.

Varco agreed to pay Baker Hughes royalties derived from the sale of its newly acquired products over an eight-year period or up to $15 million, whichever comes first.

Completion of the transaction is contingent upon approval by the boards of both companies as well as Varco shareholders. According to Mattson, the deal probably won’t be completed before August.

Varco officials were unavailable for comment on Monday, but in a prepared statement Varco Chairman W.B. Reinhold said that the “BJ Machinery products complement those of our Varco Oil Tool operation and provide substantially greater breadth to the line of products we can offer our customers.”

“Rig floor handling equipment is Varco’s bread and butter,” Mattson said. “Varco has so much expertise in this business and it is such a small part of our total operation that we felt we’d be better off as a shareholder in a business that we feel has a lot of upside. But, strategically, over the long picture, we wanted to leave that product line.”

Baker Hughes lost $254 million on $1.9 billion in sales in 1987. For the first six months of fiscal 1988, the company earned $45 million on $1 billion in sales.