2.16 Billion Shares: The Deal That Will Either Destroy or Create Transocean
When Dilution Is The Weapon
"Most stock deals, they think about what they're getting and they don't think about what they're giving up… The real question is if more value is being created, how is it being whacked up between the two companies? And if extra value isn't being created, are you getting more than you're giving?"
Warren Buffett, 2007 Annual Meeting
This newsletter is built on one idea. Own companies that eat their own shares. I write about management teams that use free cash flow to buy back stock, shrinking the share count, growing your ownership. That is the game. That has always been the game.
So what happens when one of these companies does the exact opposite?
That is exactly what is happening right now in the offshore drilling sector. Transocean share count is about to explode.
Your instinct, as a shareholder, is to sell. Decades of academic research say you should. Stock-financed acquisitions, on average, destroy value for the acquirer. The bidder's stock drops on announcement day. Long-run returns are negative. The target's shareholders walk away with most of the gains. It is one of the most robust findings in all of corporate finance.
And yet.
There are rare cases where issuing stock to acquire a business was not just acceptable, but was the single best capital allocation decision a CEO ever made. Where the dilution everyone feared turned into the foundation of generational wealth creation.
Before I break down this deal and run the numbers, I want to walk through two of those cases. Not to celebrate dilution. But to understand what separates a brilliant use of stock as currency from the far more common version where management just overpays with cheap paper.
I. Buffett's $44 Billion Bet on American Rail
“A century from now, BNSF will continue to be a major asset of the country and of Berkshire. You can count on that.”
Warren Buffett, Shareholder letter 2023
In November 2009, Warren Buffett did something he hated doing. He issued Berkshire Hathaway stock to acquire Burlington Northern Santa Fe, the largest railroad in North America. Total deal value: $44 billion. The largest acquisition in Berkshire’s history.
Berkshire issued roughly 95,000 Class A equivalent shares. Six percent dilution. For the man who had spent decades preaching about never issuing stock.
So why did he do it? BNSF was simply too large to acquire with cash alone. And the asset was irreplaceable. Nobody is going to build 32,000 miles of track through the American heartland. BNSF was a one-of-one asset.
The math worked even after the dilution. BNSF’s acquisition increased Berkshire’s pre-tax earning power by roughly 40%. Against 6% dilution, the earnings-per-share accretion was massive. If you look at replacement cost, to replicate that railroad on a transcontinental scale probably could not even be done. And even if it somehow could be done, it would eventually cost more than Berkshire’s market cap. Likely over a trillion dollars just to replicate that railroad.
Warren was right. BNSF became Berkshire’s most valuable operating subsidiary. Since 2010, it has generated tens of billions of dollars in cumulative earnings. And it will likely generate tens of billions more in the decades ahead — very possibly even a hundred years from now.
II. Henry Singleton and the Two-Phase Weapon
Singleton founded Teledyne in 1960. By most accounts, one of the most brilliant capital allocators in American business history. Munger said no one had a better record. Buffett agreed.
What Singleton did with dilution was unlike anything before or since. He turned it into a two-phase weapon.
Phase one: the 1960s. Teledyne’s stock traded at a P/E above 30, sometimes above 50. Singleton exploited this relentlessly, acquiring roughly 130 companies, almost all paid for with Teledyne stock. He used expensive paper to buy cheaper businesses. There isn’t a single clean dilution number for the 130 deals, but it was massive.
Then the music stopped. The bear market crushed Teledyne’s stock. P/E fell below 10.
Phase two was the exact opposite. From 1972 to 1984, Singleton repurchased more than 90% of Teledyne’s outstanding shares. Eight tender offers. Earnings tripled over twelve years. But because the share count fell by 90%, EPS went from about $1.64 to $45. The stock rose roughly 40x.
The dilution in the 1960s was not a mistake. It was the setup. The shares he printed when they were expensive funded an empire. Then, when those same shares became cheap, he ate them alive.
The Pattern
Both stories share the same DNA.
Dilution worked because what was acquired was worth dramatically more than what was given away. Buffett gave up 6% of Berkshire's equity and got an asset that added 40% to earning power. And the replacement value of what he acquired is practically incalculable. Singleton gave up shares trading at 50x earnings to buy businesses at 10x. In both cases, intrinsic value per share went up, not down, despite the share count increasing.
2.16 Billion Shares Outstanding
Now let me tell you what is happening right now.
Transocean just announced it is acquiring Valaris in an all-stock deal valued at $5.8 billion. When the deal closes, the combined company will have approximately 2.16 billion shares outstanding.
2.16 billion.
Transocean currently has approximately 1.1 billion shares outstanding. This deal nearly doubles the float overnight. When the deal closes, Transocean shareholders will own approximately 53% of the combined company on a fully diluted basis, with Valaris shareholders owning the remaining 47%.
Day one EBITDA per share drops from $1.36 standalone to roughly $0.90 combined. That is a 34% hit. If you are looking at this deal through the lens of what Buffett or Singleton did, it fails the test on day one.
But here is the question this entire post has been building toward. The same question Buffett asked about BNSF. The same question Singleton answered 130 times in the 1960s.
Will this dilution destroy shareholders — or make them rich?
