Schlumberger, the oilfield services company that last week bought Sema Group, an information technology company, has no publicly traded debt outstanding but will most likely need to tap the bond market in the near future to diversify its leverage away from bank debt, says Carol Levenson, analyst at Gimme Credit in Chicago. If it does so, investors should be wary. She argues that the company will leverage up both rapidly and, perhaps, frequently. She pegs the likely rating of the company at "not much better than triple-B." Most of its existing leverage comes from bank debt. "I'm sure it won't be hard for their investment bankers to convince them the bond market is just dying for some Schlumberger paper," she says. Calls to Schlumberger were not returned by press time.
Levenson also has reservations about the business model of the new entity. She points to the fact that it plans to cross-sell products and services, which is always challenging, especially considering Schlumberger has little experience with an acquisition of this size, and cost savings have yet to be quantified. She adds that this initial leveraging will only lead Schlumberger to borrow again. "Time and time again companies that have little experience answering to bondholders or rating agencies have a tendency to leverage up even further once they've gotten a taste for borrowing." The U.K.-based Sema also has problems, issuing two profit warnings last year after it purchased the U.S. telecom services company LHS. "There are precious few offsetting credit quality benefits," says Levenson.