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Business Combinations | 9 Months Ended
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Sep. 30, 2018
Business Combinations |
Business Combinations | Note 4—Business Combinations Ocean Rig UDW Inc. On September 4, 2018, we announced that we entered into the Merger Agreement with Ocean Rig, under which we agreed to acquire Ocean Rig in a cash and stock transaction. The transaction consideration is comprised of 1.6128 newly issued shares of Transocean Ltd. plus $12.75 in cash for each common share of Ocean Rig. Based on the number of Ocean Rig shares outstanding, we expect to issue approximately 147.7 million shares and make an aggregate cash payment of approximately $1.17 billion pursuant to the Merger Agreement. We expect to fund the consideration through a combination of proceeds from the issuance of debt and unrestricted cash balances. As of September 30, 2018, Ocean Rig owned and operated 11 mobile offshore drilling units, including nine ultra‑deepwater floaters and two harsh environment floaters. As of September 30, 2018, Ocean Rig was also constructing two ultra‑deepwater drillships. The Merger Agreement is subject to the satisfaction of customary closing conditions for a transaction of this type. We expect to complete the transaction before December 31, 2018. If completed, we will account for the transaction using the acquisition method of accounting, pursuant to which we will record the consideration transferred, the assets acquired and the liabilities assumed at fair value, measured as of the acquisition date. See Note 13—Equity and Note 15—Subsequent Event. Songa Offshore SE Overview—On January 30, 2018, we acquired an approximate 97.7 percent ownership interest in Songa. We believe the Songa acquisition strengthens our position as a leader in harsh environment and ultra‑deepwater drilling services by adding high value assets, including four high‑specification harsh environment floaters, supported by significant contract backlog. Additionally, the acquisition strengthens our footprint in harsh environment operating areas. The goodwill resulting from the business combination was attributed to synergies and intangible assets that did not qualify for separate recognition. In the nine months ended September 30, 2018 and 2017, we incurred acquisition costs of $7 million and $3 million, respectively, recorded in general and administrative costs and expenses. Consideration—In connection with the acquisition, we issued 66.9 million shares with a market value of $10.99 per share, based on the market value of our shares on the acquisition date. We also issued $854 million aggregate principal amount of Exchangeable Bonds, including $562 million aggregate principal amount as partial consideration to Songa shareholders and $292 million aggregate principal amount as settlement for certain Songa indebtedness. The aggregate fair value of the consideration transferred in the business combination was as follows (in millions):
|  | Total |
Consideration transferred |  |  |  |
Aggregate fair value of shares issued as partial consideration for Songa shares |  | $ | 735 |
Aggregate fair value of Exchangeable Bonds issued as partial consideration for Songa shares |  |  | 675 |
Consideration transferred to Songa shareholders |  |  | 1,410 |
Aggregate fair value of Exchangeable Bonds issued for settlement of certain Songa indebtedness |  |  | 351 |
Total consideration transferred in business combination |  | $ | 1,761 |
Assets and liabilities—We estimated the fair value of assets acquired, liabilities assumed and noncontrolling interest, measured as of January 30, 2018, as follows (in millions):
|  | Total |
Assets acquired |  |  |  |
Cash and cash equivalents |  | $ | 113 |
Accounts receivable |  |  | 115 |
Other current assets |  |  | 80 |
Property and equipment |  |  | 2,414 |
Goodwill |  |  | 462 |
Contract intangible assets |  |  | 632 |
Liabilities assumed |  |  |  |
Accounts payable and other current liabilities |  |  | 178 |
Debt |  |  | 1,768 |
Other long-term liabilities |  |  | 76 |
Net assets acquired |  |  | 1,794 |
Noncontrolling interest in business combination |  |  | 33 |
Controlling interest acquired in business combination |  | $ | 1,761 |
We estimated the fair value of the rigs and related equipment by applying a combination of income and market approaches, using projected discounted cash flows and estimates of the exchange price that would be received for the assets in the principal or most advantageous markets for the assets in an orderly transaction between participants as of the acquisition date. Additionally, we estimated the fair value of the drilling contracts by comparing the contractual dayrates over the remaining firm contract term and option periods relative to the projected market dayrates as of the acquisition date. Our estimates of fair value for these assets required us to use significant unobservable inputs, representative of a Level 3 fair value measurement, including assumptions related to the future performance of our contract drilling services reporting unit, such as future commodity prices, projected demand for our services, rig availability and dayrates. We estimated the fair value of the debt using significant other observable inputs, representative of a Level 2 fair value measurement, including the terms and credit spreads for the instruments. We have not completed our estimates of the fair values of assets acquired and liabilities assumed. We continue to review the estimated fair values of property and equipment, intangible assets, and other assets and liabilities, and to evaluate the assumed tax positions and contingencies. Estimating fair value for such assets and liabilities requires significant assumptions and judgment, which increases the likelihood that the estimates may require adjustment, and such adjustments could be material. Noncontrolling interest—On March 28, 2018, we acquired the remaining Songa shares not owned by us through a compulsory acquisition under Cyprus law, and as a result, Songa became our wholly owned subsidiary. As consideration for the remaining Songa shares, we issued 1.1 million shares and $9 million aggregate principal amount of Exchangeable Bonds and we made an aggregate cash payment of $8 million to Songa shareholders who elected to receive a cash payment or failed to make an election, for an aggregate fair value of $30 million. Contract intangible assets—In the three and nine months ended September 30, 2018, we recognized contract intangible amortization of $29 million and $78 million, respectively, recorded as a reduction of contract drilling revenues. At September 30, 2018, the aggregate carrying amount of contract intangible assets was $554 million, which we expect to amortize over the remaining contract periods, through March 2024. As of September 30, 2018, the estimated future amortization of contract intangible assets was as follows (in millions):
|  | Total |
Twelve months ending September 30, |  |  |  |
2019 |  | $ | 117 |
2020 |  |  | 117 |
2021 |  |  | 117 |
2022 |  |  | 117 |
2023 |  |  | 74 |
Thereafter |  |  | 12 |
Total carrying amount of contract intangible assets |  | $ | 554 |
Pro forma combined operating results—We have included the operating results of Songa in our condensed consolidated results of operations, commencing on the acquisition date, January 30, 2018. In the three and nine months ended September 30, 2018, our condensed consolidated statement of operations includes revenues of $137 million and $356 million, respectively, and net income of $16 million and $36 million, respectively, associated with the operations of Songa. Pro forma combined operating results, assuming the acquisition was completed as of January 1, 2017, were as follows (in millions, except per share data):
|  | Three months ended |  |  | Nine months ended |
|  | September 30, |  |  | September 30, |
|  | 2018 |  | 2017 |  |  | 2018 |  | 2017 |
Contract drilling revenues |  | $ | 816 |  | $ | 954 |  |  | $ | 2,319 |  | $ | 2,749 |
Net loss |  |  | (409) |  |  | (1,417) |  |  |  | (1,753) |  |  | (2,977) |
Per share loss - basic and diluted |  |  | (0.88) |  |  | (3.11) |  |  |  | (3.79) |  |  | (6.55) |
The pro forma financial information includes various adjustments, primarily related to additional depreciation resulting from the fair value adjustments to the acquired property and equipment and amortization resulting from the contract intangible assets. The pro forma information is not necessarily indicative of the results of operations had the Songa acquisition been completed on the assumed dates or the results of operations for any future periods.

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