Offshore oil and gas driller Pride International Inc said yesterday it plans to acquire Marine Drilling Cos, but Pride's stock fell sharply on the news, slashing the value of the all-stock deal by 16 percent to around $1.6 billion.

Under plans approved by directors of both companies, stockholders of each company will receive one share in a newly formed company for each Pride or Marine Drilling share they now own. The deal is expected to close by the end of this year.

Pride and Marine Drilling, both based in Houston, said the deal would create the offshore drilling industry's third biggest player worldwide after Transocean Sedco Forex Inc and Noble Drilling Corp, based on market capitalization plus debt. It will rank sixth based on market capitalization alone.

Pride's stock, which closed at $32.65 on Wednesday, fell $5.15, or 16 per cent, yesterday to close at $27.50, wiping out most of the premium Marine Drilling investors had stood to gain. Marine Drilling's stock fell $1.17 or 4 per cent to $26.55.

Jefferies & Co analyst Magnus Fyhr said the slump in Pride's stock price reflected disappointment that Pride was acquiring another company rather than being bought out itself.

"A lot of investors expected Pride to be a takeout target, and now that Pride is actually buying another company, some of those investors probably have got out of the stock," he said.

Other drilling and oilfield service companies also saw their stock prices fall on Thursday as did oil and gas producers. Goldman Sachs analyst Terry Darling lowered his ratings for several offshore drillers because of a recent softening in rental rates for shallow water "jackup" rigs in the U.S. Gulf of Mexico but Darling said he expected rates to recover later this summer.

David Diamond of High Rock Capital LLC, which owns about 1.8 million shares of Pride stock, said he could not understand the logic of the Marine Drilling deal and would vote against it. "All the underutilization and upside, both in terms of operating and financial leverage, lies with you right now, with Marine (Drilling) at full utilization," he told Pride executives during a conference call with investors.

The new company will keep the Pride International name and its "PDE" stock symbol. Pride stockholders will own 56 percent of the company and Marine Drilling stockholders 44 per cent. Paul Bragg, President and Chief Executive Officer of Pride, and Robert Barbanell, chairman of Marine Drilling, will hold the same positions at the combined company.

Bragg said the merger was driven by the desire to gain a position among the industry's biggest players. "I think size really does count," he said. The company's fleet will include two drillships, 11 semisubmersible rigs and 35 jackup rigs, as well as barge and platform rigs. It will employ more than 10,000 people.

Bragg said he expected the combined company to command a higher valuation in the stock market, because investors tended to favor large capitalization stocks for their greater liquidity. The combined company's larger fleet would also enable it to sign multiple-rig contracts, as sought by an increasing number of big oil and gas companies, he said.

Bragg said the outlook for the offshore drilling industry was highly favorable, with strong oil and gas prices leading to increased drilling budgets. "In all the markets in which we operate, we're seeing substantially improved capital spending," he said.

In particular, he said, there are signs that the world's biggest oil and gas companies are raising exploration and production spending again after several years in which they were preoccupied with merger and acquisition activity.

Bragg said the merger was expected to produce annual savings of about $10 million and add to the combined company's earnings per share. Pride executives quoted estimates from Salomon Smith Barney for the combined company's earnings per share of $1.59 in 2001 and $2.86 in 2002.

Current pre-merger Thomson Financial/First Call consensus earnings per share estimates for Pride International stand at $1.33 for 2001 and $2.67 for 2002.