Billionaire John Fredriksen’s Battle at Sea

To recap, the restructuring sees Fredriksen and private equity firm Centerbridge Partners stump up $610 million, with a minority of existing Seadrill bondholders providing another $450 million. In return, the group gets an 84 percent equity stake, $860 million of very high-yielding bonds and lucrative fees.

Valuing the equity is tough, but based on a Gadfly analysis it could be worth about $2.3 billion. On that basis, the rescue group’s equity stake alone could be worth roughly $2 billion.

By contrast, holders of the unsecured bonds get forced into a tiny equity stake that would represent an 85 percent haircut on the above valuation.

The deal is subject to ratification by a bankruptcy court and the angry bondholders have already started petitioning for a better outcome. This won’t be easy. They can’t dislodge Fredriksen as the banks want him center stage and committed to the recovery. In turn, Fredriksen wanted an outside partner that could confirm the deal objectively — hence roping in Centerbridge.

So the bondholders have to come up with an alternative plan, which Fredriksen and the banks support. It must be both cheaper for the company and offer the same certainty as the deal on the table. Two separate groups, one including Barclays Plc, have submitted proposals that Seadrill says it’s evaluating.

Something will need to give this year. Fredriksen and his buddies have already agreed to pass on about 10 percent of their fundraising plan to bondholders who want to subscribe for the new shares and debt. One option would be to raise that percentage. The bondholders could argue too that they have more claim on the 1.9 percent of Seadrill stock reserved currently for existing shareholders. That the shares carry any value at all remains an oddity: The company would have to emerge from restructuring with an equity value of more than $6 billion to justify the present share price.

The fight will be a litmus test of the appetite to invest in oil services as the industry starts to look past its slump. Fredriksen is clearly eyeing a recovery, having raised money in a private placement through another vehicle, Oslo-listed Northern Drilling Ltd. The S&P Oil & Gas Equipment and Services Select Industry Index is up one-third from its August low as investors start to look ahead. Brent crude is up 50 percent since June.

The macro backdrop suggests a less stormy future for Seadrill. The brighter things look, the more intense will be the fight over who benefits.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.