The oil services mergers and acquisitions pot is bubbling away merrily these day. And doubtless there will be one or two firms in the Press and Journal/Munro’s Travel delegation to this year’s Offshore Technology Conference in Houston quietly hoping to cash in . . . be taken over and to hit the perpetual golf circuit.
While that may be an exaggeration, there is no doubt in the mind of Colin Welsh, CEO of Simmons & Company International, that the market for good quality service companies is vigorous. But they have to be the right kind of business.
After years of oil companies calling the shots and dominating the supply chain, today the market is very different. Contractors and suppliers are able to pick and choose client oil companies like never before. Demand for their services is massive and global.
“There’s not another industry where you could start up out of your double garage at Westhill and within two or three years have a business that’s making a couple of million pounds in profits and distributing its equipment and services all around the world,” says Welsh.
“Especially on the subsea side, there are so many small companies with great products but they’re all niche, so how do you realise value from them?”
Basically, it all depends where your aspiration lies. People tend to fall into various categories.
“You have the guy who sets up; all of a sudden finds he’s making a decent living and he’s ripping £500,000 by way of dividends every year and he thinks this is great,” says Welsh.
“So he hunkers down and does enough to make sure he will always make a really good living. But at the point he decides to step out of the business, he finds he has a proprietorial business that no-one wants to buy. That’s the lifestyle bit.
“Then you have the guys who will set up a business, grow it and then someone comes along and offers them a bit of money. They take the money and run.
“And then you have the Richard Highams (Acteon) of the this world who are unfortunately few and far between; whose vision and ambition are such that ultimately they do phenomenally and are well rewarded.”
It is Welsh’s opinion that there has to be recognition by any entrepreneur that scale is very important when it comes to driving value; but also that several heads are better than one so, if you can pool talent, by pulling companies together invariably you will get a better result.
This is the Higham approach and the owners of each company acquired by Acteon are given the opportunity of retaining skin in the game with the likelihood that they will ultimately make a lot of money by being part of a larger adventure with shared muscle.
As part of raising the game, would it be better to encourage the many smaller companies to get just that much bigger before they get taken out/sell out?
“Yes,” says Welsh. “Get bigger but become more aware of the various ways forward. It’s about understanding the art of the possible.”
It is for this reason that Simmons established an incubator offshoot to work with baby businesses and wean them up to at least the next level in value perception terms.
“But it’s not just about money,” he argues. “Larger businesses sell for larger transaction multiples than smaller ones and the reason for that is that, typically, the quality of the businesses is better with a bigger business and they’re less likely to be knocked sideways by a fast ball or speed bump.”
It is a matter of some regret to Welsh that too many small firms sell out unnecessarily, before their future potential is properly analysed, mapped and options placed on the table.
“I think it’s particularly relevant in the subsea business because there are so many small, innovative companies in that space putting huge effort into research and development.
“The interesting thing is that, when you say to them, isn’t this R&D technology tax relief in your favour? And they say it would do but we don’t have any earnings to set it off against.
“So R&D tax relief in subsea doesn’t work. It would be different if you were getting a cheque from the government such that, if you invest £1million in R&D this year, you would get back the £1million or even 75p in the pound back the following year.
“But because these companies obviously don’t have profits of their own, they’ve got nothing to set off the relief against.”
Welsh admires the Norwegian system where investment in drilling attracts substantial tax relief.
“I’m no expert on the Norwegian system. But if you drill a well in Norway and it costs you £5million, my understanding is that you get 80-something percent of that back by way of a cheque from the government the following year.
“Banks will actually bridge that. It doesn’t seem a stretch to apply the same logic in the UK.
“That would keep more people in the game for longer but you can appreciate that if R&D money is going out the door all the time, no wonder people sell out too early because they’re strapped for cash and they very often won’t get properly rewarded for what they’ve developed.
“If they can throw themselves in with something that’s bigger; something that’s got income and generating profit, then that would give them a safety net, a source of further investment, distribution for their product and scale, which is important.”
Notwithstanding the pains of growing up and the various scenarios that every year are played out, the market for supply chain firms really is vigorous and it remains largely the preserve of European and US hunters, though investors from the Asian diaspora are increasingly muscling in.
There are two groups who buy service companies. There’s private equity and they’re split into specialist PE players like Lime Rock, First Reserve, SCF Partners and Energy Ventures, plus generalists such as Graphite and a whole bunch of others.
The other group is the trade buyers and so the service companies.
Welsh: “What I would say is that the key difference is that historically, if we were selling something, the prime candidates were the specialist PE firms; or the large service companies, particularly American. Basically Western money.
“But now we see a lot more generalist service companies coming in to look at buying things. And global investment firms like KKR have been really active. They’re the Barbarians at the gates.
“On the trade side, what you see is that it’s broadened way wider than the large service companies. Now we’re seeing large industrial companies players coming in; Lufkin being a pretty good example and GE, obviously.”
Indeed, Welsh reckons that GE will likely become the third biggest global oil service company within the next five years. But there are lots more US industrial buyers. And, more recently, left-of-field stalkers have appeared from Asia-Pac and Middle East.
“A very good example of just how international this business has become is the Reservoir Group deal,” says Welsh. “So you have a business that is Dubai headquartered, which has 30 international outlets worldwide, which is owned by a Houston-based PE company, and we sold it to an Australian public company. That’s quite an eclectic combination.
“We’re doing another big deal just now and the buyers are Scandinavian.
“There are a lot more buyers out there and there are more coming out of the woodwork by the month. We’re in a privileged position because we have a pretty significant share of the market.
“At any point in time we’ll be marketing 15-20 companies to 30, 40, 50 and perhaps more potential buyers. What we garner is a lot of market intelligence about who’s buying, who’s not buying.
The most important thing to bear in mind is the weight of money that is now staking out the oil and gas service sector is bigger than it has ever been. The wall of money is several times larger than even five years ago and, most importantly, it’s way more diverse in its source than anyone would have imagined back then.
So does this mean this is the liveliest, hottest market that Welsh has ever experienced?
Absolutely! Businesses of scale and potential are changing hands at a 50% premium to what they would have changed hands at five to 10 years ago.
“That’s why we’re really keen to impress on people the benefits of actually building something that’s bigger. Reality is that this value shift is only reflected at the top end of the market . . . larger companies. It’s not reflected at the bottom end because proprietorial businesses are exactly that and so the multiple doesn’t move.
“So, if you’re selling a business that’s making £2million of EBITDA, five years ago you would have brought £5-6-7 or even £8million for it. And today you’re still getting that £6-8million.
“But if you can collect four or five such businesses together and get a bit of organic growth and all of a sudden you have something that’s making £10million or more. You could probably sell that business for £70-80million.
“The value increase is almost exponential.”
Unfortunately, the UK has few world-class listed companies that concentrate on energy. Amec and Wood are North Sea household names, but are they growing fast enough not to get picked off?
“I think they’re working hard on their growth strategies,” says Welsh. “But there are two different questions. Do they have aggressive enough growth strategies? I think they do. Amec’s got this £2billion Foster Wheeler thing going: the deal was agreed in February. That’s pretty ambitious. Tick in the box for that.
“Wood Group under Bob Keiller has continued to make significant acquisitions; no lack of ambition from Bob and I would expect that to continue.”
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