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Acquiring Halter Marine Won't Bail Friede out of Deep-Water Doldrums

With or without Halter, the company faces plunging rental rates on new deep-water rig contracts.

Friede Goldman


can breathe a little easier now that it's buying

Halter Marine



Friede is working through its backlog of deep-water rig-building projects with no new projects on the horizon. But Halter promises to diversify Friede's business, bringing a major line of government and commercial shipbuilding projects, such as high-speed patrol boats, ferries and tow boats. Halter's non-energy related shipbuilding contracts account for about $400 million to $500 million in revenue annually; for Halter's fiscal year ended March 31, it generated $998 million in total revenue.

Both companies also are talking about opportunities for "significant" cost-savings. In addition to savings on administrative costs, the combined company will generate operational savings and will have better purchasing power, J.L. Holloway, Friede's chairman and chief executive, said on a conference call with analysts and investors. The companies haven't set specific targets yet.

All this, however, may not alleviate Friede's deep-water problems. The new company, to be called

Friede Goldman Halter

, will face an increasingly competitive market for shipyard projects. An overhang of deep-water rigs has caused rental rates on new contracts to plunge, and it will likely be years before oil companies undertake new rig construction projects.

Terms of the deal call for each Halter share to be exchanged for 0.4614 of a share of Friede stock. Based on Wednesday's stock action, the deal values Halter shares at about 7 1/2 each. Halter fell on the news, closing down 13/32 at 6 29/32. Friede climbed 9/16 to 16 15/16.

Holloway will lead the new company as chairman and chief executive; in two years he will be succeeded by John Dane, Halter's chairman, president and chief executive, who until then will serve as vice chairman, president and chief operating officer.

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On a proforma basis, the combined company would have generated nearly $1.5 billion in revenue for the 12 months ended March 31.

Halter's engineered products group, which manufactures a wide variety of products used in the marine industry, including cranes, hoists, derricks, winches and control systems, is a good match for Friede's


unit, which designs and manufactures drilling and marine deck equipment.

"Synergistically it makes a lot of sense," says Janet Rasmussen, an analyst at

Merrill Lynch

who follows Halter. She has a neutral rating on Halter; Merrill hasn't performed underwriting for Halter.

The new company also may benefit from Friede's efforts to move into the manufacture of floating production and storage units, huge vessels known as FPSO's that allow for oil production in remote locations with little or no infrastructure. Friede has been involved in the design and conversion of supertankers to FPSOs, but hasn't built new ones. This area is one Holloway has pushed for months, but it's also very competitive.

The new company's best measure of health will still be its backlog, and some observers figure this backlog will fall over the next several quarters. When the June quarter numbers are released, backlogs for both Friede and Halter will have declined by a few hundred million dollars, estimates one sell-sider in New Orleans who declined to be named. He figures Friede's backlog will be around $300 to $325 million, down from over $400 million at March 31. He also estimates Halter's backlog will decline to between $500 million and $525 million from $656 million at the end of March. Holloway says the backlog is not a major concern since Friede is constantly marketing to customers.

Included in Friede's $400 million backlog is a $143 million contract from a Brazilian company to build a semisubmersible rig, but the contract depends on the Brazilian company securing financing for the rig. Holloway says he expects the company will secure the necessary financing.

The new company also will have to straighten out accounting irregularities that have been reported at one of Halter's shipyards. An internal investigation is ongoing and is expected to be concluded within 30 days, says a Halter spokesman. "If anything, the impact

of the investigation would be a recovery of monies that were improperly accounted for," he says.

Holloway, meanwhile, says after looking at Halter's books he sees more upside potential than the Street does. But until Wall Street sees more projects coming Friede's way, that may not change.