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Rowan Transaction | 6 Months Ended
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Jun. 30, 2019
Business Combinations [Abstract] |
Business Combination Disclosure [Text Block] | On October 7, 2018, we entered into a transaction agreement (the "Transaction Agreement") with Rowan. On April 11, 2019 (the "Transaction Date"), we completed our combination with Rowan pursuant to the Transaction Agreement (the "Rowan Transaction"). Rowan's financial results are included in our consolidated results beginning on the Transaction Date. Prior to the Rowan Transaction, Rowan and Saudi Aramco formed a 50/50 joint venture to own, manage and operate drilling rigs offshore Saudi Arabia ("Saudi Aramco Rowan Offshore Drilling Company" or "ARO"). ARO currently owns a fleet of seven jackup rigs, leases another nine jackup rigs from us (two of which are expected to commence drilling operations during the third quarter of 2019) and has plans to order up to 20 newbuild jackup rigs over the next 10 years. See Note 4 for additional information on ARO. The Rowan Transaction is expected to enhance the market leadership of the combined company with a fleet of high-specification floaters and jackups and position us well to meet increasing and evolving customer demand. The increased scale, diversification and financial strength of the combined company will provide us advantages to better serve our customers. Exclusive of two older jackup rigs marked for retirement, Rowan’s offshore rig fleet as of the Transaction Date consisted of four ultra-deepwater drillships and 19 jackup rigs. Consideration As a result of the Rowan Transaction, Rowan shareholders received 2.750 Valaris Class A ordinary shares for each Rowan Class A ordinary share, representing a value of $43.67 per Rowan share based on a closing price of $15.88 per Valaris share on April 10, 2019, the last trading day before the Transaction Date. Total consideration delivered in the Rowan Transaction consisted of 88.3 million Valaris shares with an aggregate value of $1.4 billion, inclusive of $2.6 million for the estimated fair value of replacement employee equity awards. Upon closing of the Rowan Transaction, we effected a consolidation (being a reverse stock split under English law) where every four existing Class A ordinary shares, each with a nominal value of $0.10, were consolidated into one Class A ordinary share, each with a nominal value of $0.40. All share and per share data included in this report have been retroactively adjusted to reflect the Reverse Stock Split. Assets Acquired and Liabilities Assumed Under U.S. GAAP, Valaris is considered to be the acquirer for accounting purposes. As a result, Rowan's assets acquired and liabilities assumed in the Rowan Transaction were recorded at their estimated fair values as of the Transaction Date under the acquisition method of accounting. When the fair value of the net assets acquired exceeds the consideration transferred in an acquisition, the difference is recorded as a bargain purchase gain in the period in which the transaction occurs. We have not finalized the fair values of assets acquired and liabilities assumed; therefore, the fair value estimates set forth below are subject to adjustment during a one-year measurement period subsequent to the Transaction Date. The estimated fair values of certain assets and liabilities including materials and supplies, long-lived assets, contingencies and unrecognized tax benefits require judgments and assumptions that increase the likelihood that adjustments may be made to these estimates during the measurement period, and those adjustments could be material. The provisional amounts for assets acquired and liabilities assumed are based on preliminary estimates of their fair values as of the Transaction Date and are as follows (in millions):
| Estimated Fair Value
Assets: |
Cash and cash equivalents | $ | 931.9 |
Accounts receivable(1) | 207.1 |
Other current assets | 101.6 |
Long-term notes receivable from ARO | 454.5 |
Investment in ARO | 138.8 |
Property and equipment | 2,989.8 |
Other assets | 41.7 |
Liabilities: |
Accounts payable and accrued liabilities | 259.4 |
Current portion of long-term debt | 203.2 |
Long-term debt | 1,910.9 |
Other liabilities | 376.3 |
Net assets acquired | 2,115.6 |
Less: Transaction consideration | (1,402.8 | )
Estimated bargain purchase gain | $ | 712.8 |
(1) | Gross contractual amounts receivable totaled $208.3 million as of the Transaction Date.
Bargain Purchase Gain The estimated fair values assigned to assets acquired net of liabilities assumed exceeded the consideration transferred, resulting in a bargain purchase gain primarily driven by the decline in our share price from $33.92 to $15.88 between the last trading day prior to the announcement of the Rowan Transaction and the Transaction Date. The estimated bargain purchase gain of $712.8 million was reflected in other, net, in our condensed consolidated statement of operations for the three-month and six-month periods ended June 30, 2019. Transaction-Related Costs Transaction-related costs were expensed as incurred and consisted of various advisory, legal, accounting, valuation and other professional or consulting fees totaling $15.0 million and $17.8 million for the three-month and six-month periods ended June 30, 2019. These costs were included in general and administrative expense in our condensed consolidated statements of operations. Materials and Supplies We recorded materials and supplies at an estimated fair value of $83.0 million. Materials and supplies consist of consumable parts and supplies maintained on drilling rigs and in shore-based warehouse locations for use in operations and is generally comprised of items of low per unit cost and high reorder frequency. We estimated the fair value of Rowan's materials and supplies primarily using a market approach. Equity Method Investment in ARO The equity method investment in ARO was recorded at its estimated fair value as of the Transaction Date. See Note 4 for addition information on ARO. We estimated the fair value of the equity investment primarily by applying an income approach, using projected discounted cash flows of the underlying assets, a risk-adjusted discount rate and an estimated effective income tax rate. Property and Equipment Property and equipment acquired in connection with the Rowan Transaction consisted primarily of drilling rigs and related equipment, including four drillships and 19 jackup rigs (exclusive of two jackups marked for retirement). We recorded property and equipment at its estimated fair value of $3.0 billion. We estimated the fair value of the rigs and equipment by applying an income approach, using projected discounted cash flows, a risk-adjusted discount rate and an estimated effective income tax rate. The estimated remaining useful lives for Rowan's drilling rigs ranged from 16 to 35 years based on original estimated useful lives of 30 to 35 years. Intangible Assets and Liabilities We recorded intangible assets and liabilities of $16.2 million and $2.1 million, respectively, representing the estimated fair value of Rowan's firm contracts in place at the Transaction Date with favorable or unfavorable contract terms compared to then-market day rates for comparable drilling rigs. The various factors considered in the determination of these fair values were (1) the contracted day rate for each contract, (2) the remaining term of each contract, (3) the rig class and (4) the market conditions for each respective rig class at the Transaction Date. The intangible assets and liabilities were calculated based on the present value of the difference in cash flows over the remaining contract term as compared to a hypothetical contract with the same remaining term at an estimated then-current market day rate using a risk-adjusted discount rate and an estimated effective income tax rate. Operating revenues were reduced by $1.1 million for net asset amortization during the period from the Transaction Date through June 30, 2019. The remaining balance of intangible assets and liabilities of $14.9 million and $1.9 million, respectively, was included in other assets and other liabilities, respectively, on our condensed consolidated balance sheet as of June 30, 2019. These balances will be amortized to operating revenues over the respective remaining contract terms on a straight-line basis. As of June 30, 2019, the remaining terms of the underlying contracts is approximately 2.5 years. Amortization of these intangibles is expected to result in a reduction to revenue of $2.6 million, $5.1 million and $5.4 million for 2019, 2020 and 2021, respectively. Long-term Debt We recorded Rowan's long-term debt at its estimated fair value as of the Transaction Date, which were based on quoted market prices for Rowan's publicly traded debt as of April 10, 2019. Deferred Taxes The Rowan Transaction was executed through the acquisition of Rowan's outstanding ordinary shares and, therefore, the historical tax bases of the acquired assets and assumed liabilities, net operating losses and other tax attributes of Rowan, were assumed as of the Transaction Date. However, adjustments were recorded to recognize deferred tax assets and liabilities for the tax effects of differences between acquisition date fair values and tax bases of assets acquired and liabilities assumed. Additionally, the interaction of our and Rowan's tax attributes that impacted the deferred taxes of the combined entity were also recognized as part of acquisition accounting. As of the Transaction Date, an increase of $10.0 million and a decrease of $98.0 million to Rowan's historical net deferred tax liabilities and deferred tax assets, respectively, was recognized. Deferred tax assets and liabilities recognized in connection with the Rowan Transaction were measured at rates enacted as of the Transaction Date. Tax rate changes, or any deferred tax adjustments for new tax legislation, following the Transaction Date will be reflected in our operating results in the period in which the change in tax laws or rate is enacted. Uncertain Tax Positions Uncertain tax positions assumed in a business combination are measured at the largest amount of the tax benefit that is greater than 50% likely of being realized upon effective settlement with a taxing authority that has full knowledge of all relevant information. As of the Transaction Date, Rowan had previously recognized net liabilities for uncertain tax positions totaling $50.4 million. Subsequent to the Transaction Date, we received tax assessments related to certain filing positions taken by Rowan in prior years totaling approximately $159.0 million. We continue to evaluate these and other Rowan filing positions and have recognized additional liabilities of $52.0 million, which reflects the amount of the Rowan filing positions that we have preliminarily concluded we will not more-likely-than-not sustain. Our continuing evaluation of the relevant facts and circumstances surrounding these positions may result in revisions to this estimate, which could be material. Revenue and Earnings of Rowan Our condensed consolidated statements of operations for the three-month and six-month periods end June 30, 2019 include revenues of $147.2 million and a net loss of $95.3 million associated with Rowan's operations from the Transaction Date through June 30, 2019. Unaudited Pro Forma Impact of the Rowan Transaction The following unaudited supplemental pro forma results present consolidated information as if the Rowan Transaction was completed on January 1, 2018. The pro forma results include, among others, (i) the amortization associated with acquired intangible assets and liabilities (ii) a reduction in depreciation expense for adjustments to property and equipment (iii) the amortization of premiums and discounts recorded on Rowan's debt (iv) removal of the historical amortization of unrealized gains and losses related to Rowan's pension plans and (v) the amortization of basis differences in assets and liabilities of ARO. The pro forma results do not include any potential synergies or non-recurring charges that may result directly from the Rowan Transaction.
(in millions, except per share amounts) | Three Months Ended June 30, |  | Six Months Ended June 30,
| 2019(1) |  | 2018 |  | 2019(1) |  | 2018
Revenues | $ | 599.0 |  |  | $ | 699.8 |  |  | $ | 1,179.5 |  |  | $ | 1,328.0 |
Net loss | $ | (264.9 | ) |  | $ | (172.6 | ) |  | $ | (596.4 | ) |  | $ | (373.5 | )
Loss per share - basic and diluted | $ | (1.35 | ) |  | $ | (0.88 | ) |  | $ | (3.04 | ) |  | $ | (1.90 | )
(1) Pro forma net loss and loss per share were adjusted to exclude an aggregate of $71.5 million and $80.8 million of transaction-related and integration costs incurred for the three-month and six-month periods ended June 30, 2019, respectively, and the estimated $712.8 million bargain purchase gain.

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- Definition The entire disclosure for a business combination (or series of individually immaterial business combinations) completed during the period, including background, timing, and recognized assets and liabilities. The disclosure may include leverage buyout transactions (as applicable). + References Reference 1: http://fasb.org/us-gaap/role/ref/legacyRef -Publisher FASB -Name Accounting Standards Codification -Topic 805 -URI http://asc.fasb.org/topic&trid=2303972 + Details
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