Pri­vacy Dur­ing A Dif­fi­cult Time

Con­di­tions are ripe for a grow­ing num­ber of pri­vate eq­uity-led buy­outs of pub­lic com­pa­nies

Alberta Oil - - SMART MONEY -

IN A “LOWER FOR LONGER” COM­MOD­ITY

price en­vi­ron­ment, Cana­dian en­ergy and en­ergy ser­vices com­pa­nies are fac­ing dif­fi­cult cir­cum­stances in pre­serv­ing value. To­tal de­clines in mar­ket cap­i­tal­iza­tion among Cana­dian oil and gas com­pa­nies from July 2014 to Fe­bru­ary 2016 are es­ti­mated to ex­ceed $230 bil­lion, based on avail­able data from S&P Cap­i­tal IQ. Man­age­ment teams have been par­tic­u­larly hard hit. Ap­prox­i­mately $11.4 bil­lion of those losses are at­trib­ut­able to shares and op­tions held by man­age­ment and other in­sid­ers.

This en­vi­ron­ment is caus­ing com­pa­nies to re­con­sider how they do busi­ness. The sever­ity of cur­rent and prospec­tive mar­ket con­di­tions is forc­ing them to look be­yond con­ven­tional means of cost sav­ings, such as re­duc­ing G&A, low­er­ing op­er­at­ing costs or shut­ting in pro­duc­tion. Whether as part of a strate­gic process or oth­er­wise, com­pa­nies are in­creas­ingly look­ing at more fun­da­men­tal al­ter­na­tives in order to pre­serve value, with a view to po­si­tion­ing them­selves for growth when con­di­tions im­prove.

One strate­gic al­ter­na­tive, which is at­tract­ing at­ten­tion in the cur­rent en­vi­ron­ment, is the go­ing pri­vate trans­ac­tion, where pub­lic share­hold­ers are bought out for cash and the com­pany delists and be­comes a pri­vate, non-re­port­ing com­pany. A go­ing pri­vate trans­ac­tion al­lows man­age­ment teams to fo­cus on what they do best—cre­ate value—with­out the cost and pres­sures as­so­ci­ated with be­ing a pub­lic com­pany. This is es­pe­cially true for com­pa­nies who are able to part­ner with a pri­vate eq­uity fund or other source of long-term cap­i­tal, as those types of in­sti­tu­tional in­vestors are able to fi­nance and sup­port ac­qui­si­tions, cap­i­tal ex­pen­di­ture re­quire­ments and work­ing cap­i­tal/liq­uid- ity needs dur­ing an ex­tended down­turn.

Since July 2015, there have been three pri­vate eq­uity-backed go­ing pri­vate trans­ac­tions in­volv­ing Cana­dian en­ergy and en­ergy ser­vices com­pa­nies: Cana­max En­ergy Ltd. (Edge Nat­u­ral Re­sources) and Platino En­ergy Corp. (Den­ham Cap­i­tal), both now com­pleted; and Boul­der En­ergy Ltd. (ARC Fi­nan­cial), an­nounced on Fe­bru­ary 24, 2016. In con­trast, there were only 15 go­ing pri­vate trans­ac­tions in the en­ergy sec­tor dur­ing the 10 years prior.

I EX­PECT GROW­ING IN­TER­EST IN GO­ING

pri­vate trans­ac­tions in 2016, and there are sev­eral rea­sons for this. A num­ber of newly-raised en­ergy-fo­cused pri­vate eq­uity funds have closed in re­cent years, and, as a re­sult, there is sig­nif­i­cant “dry pow­der” on the side­lines, both in terms of eq­uity and debt cap­i­tal, look­ing for at­trac­tive M&A tar­gets. More­over, the low Cana­dian dol­lar may gen­er­ate ad­di­tional in­vest­ment in­ter­est by US pri­vate eq­uity funds in par­tic­u­lar, given that Cana­dian com­pany val­u­a­tions may be more at­trac­tive in U.S.-dol­lar terms than com­pa­ra­ble U.S. com­pa­nies.

There is also pres­sure on pri­vate eq­uity funds to source new trans­ac­tions and to back (and thus tie-up) good man­age­ment teams, es­pe­cially in ar­eas of the en­ergy sec­tor that are op­por­tune for in­dus­try con­sol­i­da­tion.

Ex­ist­ing man­age­ment teams in pub­licly-traded com­pa­nies, whose share prices have not reached their po­ten­tial, of­ten find it ap­peal­ing to part­ner with fi­nan­cial spon­sors who can not only close the go­ing pri­vate trans­ac­tion, but who will also fi­nance fu­ture growth op­por­tu­ni­ties. This part­ner­ship be­tween a fi­nan­cial spon­sor and man­age­ment can also pro­vide the lat­ter with sig­nif­i­cant eco­nomic up­side if cash-on-cash re­turns to the spon­sor ex­ceed agreed-upon hur­dle rates.

A grow­ing num­ber of pub­lic com­pa­nies in the com­modi­ties space have been run­ning strate­gic re­views for a long time, and, as a re­sult, tar­get board mem­bers may be more amenable to rec­om­mend­ing.

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