425: Dril-Quip Defends Innovex Merger, Challenges Accuracy of Glass Lewis Report

Dril-Quip publicly refuted a report by Glass Lewis, urging stockholders to vote in favor of the proposed merger with Innovex Downhole Solutions, emphasizing the strategic and financial benefits of the transaction.

Summary

• Dril-Quip is challenging the accuracy of a report issued by Glass Lewis regarding its proposed merger with Innovex Downhole Solutions.
• Dril-Quip believes the Glass Lewis report contains unsubstantiated conclusions and disregards the rationale and financial benefits of the transaction.
• Dril-Quip states that Glass Lewis declined to engage in discussions with the company, leading to a misguided review.
• The company highlights that the proposed transaction follows a comprehensive assessment of standalone and strategic alternatives.
• Dril-Quip's Board of Directors unanimously recommends stockholders vote FOR the transaction with Innovex at the special meeting on September 5th, 2024.
• Dril-Quip emphasizes the strategic merits of the merger, including a scaled and diversified global market presence, a curated portfolio of complementary products, and key market expansion.
• The company anticipates approximately $30 million per year in cost synergies.
• The merger is expected to improve earnings stability, resilience, and growth, while maintaining a net cash position for future investments.
• Dril-Quip and Innovex withdrew the charter amendment proposal (Proposal No. 2) and the related non-binding governance proposals (Proposal Nos. 3A F), eliminating the requirement that stockholders approve these proposals as a condition of the closing of the merger.

Sentiment

Score: 6

Explanation: The sentiment is neutral to slightly positive. While Dril-Quip is defending the merger and highlighting its benefits, the negative recommendation from Glass Lewis introduces uncertainty.

Positives

• The merger is expected to be immediately accretive to Dril-Quip stockholders.
• The combined company will have a scaled and diversified global market presence.
• The merger will establish a curated portfolio of complementary products.
• The company anticipates approximately $30 million per year in cost synergies.
• The combined company will maintain a net cash position for future investment and acquisitions.

Negatives

• Glass Lewis issued a report with negative recommendations regarding the merger.
• Glass Lewis declined to engage with Dril-Quip's management and board before issuing its report.
• The report contains unsupported conclusions, and does not capture the significant strategic and financial potential of this transaction.

Risks

• The risk associated with Dril-Quips ability to obtain the approval of the proposed transaction by its stockholders required to consummate the proposed transaction and the timing of the closing of the proposed transaction, including the risk that the conditions to the transaction are not satisfied on a timely basis or at all and the failure of the transaction to close for any other reason.
• The risk that a consent or authorization that may be a required approval for the proposed transaction is not obtained or is obtained subject to conditions that are not anticipated.
• Unanticipated difficulties or expenditures relating to the transaction, the response of business partners and retention as a result of the announcement and pendency of the transaction; and the diversion of management time on transaction related issues, the impact of general economic conditions, including inflation, on economic activity and on Dril-Quips and Innovexs operations, the general volatility of oil and natural gas prices and cyclicality of the oil and gas industry, declines in investor and lender sentiment with respect to, and new capital investments in, the oil and gas industry, project terminations, suspensions or scope adjustments to contracts, uncertainties regarding the effects of new governmental regulations, Dril-Quips and Innovexs international operations, operating risks, the impact of our customers and the global energy sector shifting some of their asset allocation from fossil fuel production to renewable energy resources, and other factors detailed in Dril-Quips public filings with the Securities and Exchange Commission (the SEC).

Future Outlook

The company anticipates significant value and strategic benefits from the merger, enhancing long-term growth, resilience, and prospects. The combined company will have a net cash position for future investments and acquisitions.

Management Comments

• 'We are surprised by Glass Lewiss decision to publish its recommendations without engaging in any dialogue with the Company,' said John V. Lovoi, Dril-Quips Chairman of the Board.
• 'The report, issued without a prior meeting or discussion with the Company, contains unsupported conclusions, and does not capture the significant strategic and financial potential of this transaction.'
• 'Dril-Quip and its Board of Directors continue to believe that this proposed transaction with Innovex is in the best interests of our stockholders.'

Industry Context

The oil and gas industry is currently experiencing a wave of consolidation as companies seek to improve efficiency and expand their market presence. This merger aligns with that trend, aiming to create a stronger, more diversified entity.

Comparison to Industry Standards

• Comparable mergers in the oil and gas sector, such as the combination of Baker Hughes and GE's oil and gas business, have aimed to achieve similar synergies and market expansion.
• The projected $30 million in cost synergies is within the typical range for mergers of this size in the industry.
• The focus on maintaining a net cash position is a common strategy for companies looking to weather the cyclical nature of the oil and gas market.

Stakeholder Impact

• Shareholders are being urged to vote in favor of the merger, which Dril-Quip believes will enhance long-term value.
• Employees of both Dril-Quip and Innovex may be affected by the integration of the two companies.
• Customers could benefit from a broader range of products and services.

Next Steps

• Dril-Quip stockholders will vote on the proposed merger at a special meeting on September 5, 2024.

Key Dates