Newport Beach-based Smith International Inc. and its wholly owned Canadian subsidiary have agreed to sell their Drilco Industrial division, a major mining equipment manufacturer, to a private investor group in St. Louis, Mo., for $5.1 million--$3.3 million below book value.
Because Smith International has entered a Chapter 11 reorganization proceeding under the federal Bankruptcy Code, the proposed sale agreement still must be approved by the Bankruptcy Court in Los Angeles.
The division is being sold at such a deep discount, said Smith attorney Dan Steigerwald, because "it was the best offer we received."
He said Drilco has been on the market since late 1984, when Smith decided to get out of the mining business and concentrate on its primary business of manufacturing drill bits and other oil field equipment.
Drilco, which is expected to lose about $200,000 this year on revenues of between $17 million and $18 million, hasn't been very profitable since one of its key patents expired about two years ago, Steigerwald said.
Although Drilco still is a leading producer of equipment for coal, iron and copper mining, it has lost market share in recent years because of increased competition from oil service companies that have tried to boost their sagging business by moving into the mining sector.
Under the sale agreement, Steigerwald said, RB Capital Inc., a group of private investors, would purchase Drilco's main manufacturing operation in Midland, Tex., from Smith International. RB would purchase a smaller Drilco operation in Sudbury, Ontario, from Smith International Canada Ltd. RB has agreed to acquire all inventory, machinery and some receivables at both sites but will allow Smith to retain ownership of the land and buildings.
At the close of the sale, RB would pay $4.54 million in cash, of which $3.15 million would go to Smith International and $1.39 million to its Canadian subsidiary. In addition, RB would provide two promissory notes totaling $540,000, one to Smith International for $400,000 and another to the Canadian subsidiary for $140,000. Both notes would be paid in full within a year.
In addition, RB has agreed to enter into five-year leases on both the Midland and Sudbury properties, paying Smith a total rent of $240,000 per year for the first two years and $300,000 for each of the last three years.