Updated from 11:09 a.m. EDT

In a deal that will create the world's third-largest oil services company, Transocean Sedco Forex ( RIG) announced Monday that it would acquire R&B Falcon ( FLC) for stock valued at about $5.8 billion.

The combined company will be the industry's largest offshore drilling contractor, with an equity market capitalization of $17.7 billion. Company officials said that the transaction should immediately add to the Houston-based company's cash flow, and that it would be "modestly" dilutive to earnings per share in 2001, but add to them thereafter.

Under the terms of the deal, R&B Falcon shareholders will receive half a share of newly issued Transocean Sedco Forex stock for each R&B Falcon share, resulting in the distribution of an estimated 100 million shares. Based on Transocean Sedco Forex closing price of 57 11/16 on Friday, R&B Falcon shareholders would receive shares valued at $28.84. That's a 14.5% premium for R&B Falcon shareholders based on the Friday closing price of 25 3/16.

Transocean Sedco Forex will also assume Houston-based R&B Falcon's approximately $3.0 billion of debt.

Transocean Sedco Forex finished Monday regular trading down 4 1/2, or 8%, at 53 3/16, while R&B Falcon closed flat at 25 3/16.

The companies said the transaction should be completed by the end of the first quarter of 2001, pending regulatory and stockholders' approval. The deal is expected to be tax-free to R&B Falcon shareholders.

Victor E. Grijalva, chairman of Transocean Sedco Forex, said the deal would help expand the company's 72-rig offshore fleet, by adding R&B Falcon's 139 mobile offshore drilling units and marine barges. He also cited R&B Falcon's strong presence in the Gulf of Mexico.

The two companies have already jointly designed and constructed 17 new mobile offshore drilling units, expected to be delivered by the end of the first quarter of 2001. Grijalva said in a statement the construction is part of the company's new-build capital expansion program, which he called the largest in the industry's history.

The combined company will be the third-largest oil field services provider in the world -- behind No. 1 Halliburton, based in Dallas, and the New York-based oil services company, Schlumberger.