HOUSTON (Bloomberg) -- Diamond Offshore Drilling Inc. said it agreed to buy Bermuda-based Arethusa (Off-Shore) Ltd. for $516 million in stock, or about $25.42 a share.

Under the proposed transaction, Arethusa shareholders would receive 0.88 share of Diamond Offshore stock for each Arethusa share. Arethusa also would pay a 25-cent cash dividend before the transaction is completed.

Shares in Houston-based Arethusa rose $2.25, or 9.4 percent, to $26.125 in late trading on news of the proposed sale, which is expected to be completed by June 30.

Shares of Houston-based Diamond Offshore rose $1.875, or 6.1 percent, to $30.75. Some 747,000 shares traded, more than triple the three-month daily average of 218,000 shares, as investors bet Diamond Offshore will increase earnings by consolidating its operations with Arethusa.

In a conference call with analysts this morning, Diamond Offshore's chief financial officer, Larry Dickerson, declined to estimate how much the company will be able to wring out of Arethusa's operating costs, which included $8.7 million in general and administrative expense in the year ended September 30.

"We do expect cost savings,'' Dickerson said. "It does take some time to be able to realise those savings.'' The merger of the two operators of deepwater drilling rigs comes amid accelerating consolidation of the offshore oil service business. Last month, for example, New Orleans-based Tidewater Inc. agreed to pay $277 million for Hornbeck Offshore Services Inc., a Galveston, Texas-based operator of service boats.

While Diamond Offshore and Arethusa control a significant share of the semisubmersible drilling rig market in the Gulf of Mexico, the acquisition isn't expected to raise antitrust concerns, said Robert Rose, Diamond Offshore's president and chief executive.

"Any drilling rig with any flag can operate in the Gulf of Mexico,'' he said.

"When you look at antitrust, you must look at all of the rigs, all over the world.'' Diamond Offshore raised $312 million in an initial public offering of 13 million shares in October.

Arethusa shares have more than doubled from a 52-week low of 10 5/8 a year ago. Arethusa has been on the market since at least September, when its two largest shareholders, Alphee SA and Forvaltnings AB Ratos, asked the company to put itself up for sale.

Arethusa owns a fleet of 14 mobile drilling rigs. Diamond Offshore has about 37 offshore rigs.

Arethusa chairman Mr. Michael Naess could not be reached on Friday for comment.

Arethusa maintains a physical presence in Bermuda with offices at Nautilus House, Warwick.