Late spring saw Aberdeen company Downhole Products gobbled up by fast-growing Varel International for an undisclosed sum. What perhaps differentiates this deal from so many others is that Varel’s president is a Scot who led a management buy-in of the US firm in 1998 when it was about the same size as the latest target.
Varel has been in the drill-bit business for almost 60 years. The company was founded by Daniel Varel in the late-1940s/early-1950s in the US. It did reasonably well, but had yet to realise its true potential. Jim Nixon spotted his chance, put together the MBI team and succeeded in buying the business.
“We bought the company with the strategic vision of building it into a global player in the oil&gas drill-bit business,” Nixon told Energy.
“When the company was first acquired, it had a very small oil&gas business, but more significant industrial and mining segment. When we bought the company in 1998, revenues stood at $30million a year … $20million coming from industrial/mining drill-bits.”
By the end of 2007, Nixon and his team had built group turnover to almost $200million a year, making strategic acquisitions along the way. They were American firm Walker McDonald on the roller-cone side of the business, followed by two “very small” PDC (polycrystalline diamond) drill-bit companies – one in Europe and the other in the US.
Nixon said: “When we bought the company in 1998, it was very US and Canada-centric. Over 85% of revenues were from the US and Canada, with only a small piece coming from the international marketplace.
“However, over the past 10 years, we’ve built a very significant direct sales network across the world … from Aberdeen to North Africa, to the Middle East, to West Africa and the Far East. Our business has gone from $30million, 85% of which was US and Canada, to a position where 2008 will be in the region of $250million revenues, of which more than 55% will be international.”
The reason for such heavy emphasis on internationalisation is simple – the US and Canadian markets are very cyclical, whereas the global stage tends to be more stable. That said, the real heart of Varel is in Dallas, Texas. The holding company is Varel International Energy Services. Varel International is the drill-bit segment of which Aberdeen-based Varel Europe is a significant part.
So why acquire Downhole Products? As far as Nixon is concerned the answer is simple – it has fresh technologies that complement Varel’s offering to the market, and the people to match.
“It’s very innovative. We feel that the people who have built the business have a great track record; the product line is outstanding, and growing with very good protection from an intellectual property perspective.
“My first real visit with Downhole Products was probably four years ago, when I met Bill Barron (one of the firm’s three founders). We were looking at the market and had come to the conclusion that we had a common foe – that is, the companies that were emerging in the casing drilling market. We felt as though we could do something together by combining their downhole tools expertise with our drill-bit expertise and come up with products that could fill gaps in the casing drilling market. It became clear by early-2008 that acquisition was the way forward.”
So what made the difference after three-and-a-half years? What fell into place?
According to Alistair Clark, another of DHP’s founders, of all the approaches made, Varel’s seemed the best. They spoke “the same language”. Moreover, Clark, Barron and the third founder, Ian Kirk, are sufficiently comfortable to want to stay with the business they built.
Nixon: “That’s one of the attractions of Downhole Products. We have three founders who are very committed to the business and its people. The last thing I would want to do is pick up a small, innovative company like this and find that the people who made the company what it is today don’t want to be in it going forward.”
Does that mean there’s a lock-in period for the Aberdeen trio? Not according to Clark.
“We are locked in by our choice because we want to be locked in. I’m one of the older ones. I’m 60. I’ve got my bus pass. I can’t work forever, but I may wish to do that.”
The Caledonian dimension cannot be ignored, it seems.
“Cultural fit?” asked Nixon.
“I’m a Scot, albeit having lived in Texas for 13 years, but the culture of the companies is very similar. Both have started off with an immense task ahead of them.
“Look at Varel. We’ve come from being a minnow in the drill-bit business to being perhaps fourth placed player globally … competing with big multinational service companies. The funny thing is that our paths have crossed in the past. I used to live in Culter. I drove past the motorcycle shop (where Barron, Clark and Kirk started out) every morning.
“One morning, I spotted something very different in the window … it turned out to be a Spiroliser (an early DHP line). This is going back 14 years. There’s been acknowledgement and a knowledge of one another since.”
Clearly, Nixon sees the suite of products that Downhole Products has in its stable as complementing Varel’s portfolio. Moreover, the brand will be retained as it has such a strong reputation around ket markets.
He also wants to hoist Varel into the top three global bit players – if possible, grabbing the pole position.
“There’s a huge gap. We’ve probably got to double in size in order to get into the top three. But that’s OK because we’ve grown tenfold in the last 10 years, so doubling doesn’t seem such a big task. I think we’re gaining terrific momentum … it’s like a wave building. The hardest part was going from $10million to $20million, then $20million to $40million, because we didn’t have the background, reputation, track record or history. But Varel’s through all of that.
“I think a lot of the same stuff that happened to Varel applies with the Downhole Products. I see a lot of similarities in the stage that DHP is at now versus where Varel was six or seven years ago. DHP was $28million in 2007. Varel’s growth rate has compounded at 30% on a revenue basis for each of the last six years, which makes us the fastest-growing company in the oil&gas drill-bit segment. We anticipate that DHP will add to that.”