Are going private transactions on the rise? Conditions are ripe for an increased number of private equity-led buyouts of public companies.
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 during the period from July 2014 to February 2016 are estimated to exceed $230 billion, based on available data from S&P Capital IQ (chart below). 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 reduced G&A, lower 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 enterprise 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 – creating 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/liquidity 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 sector during the prior 10 years.
We expect growing interest in going private transactions in 2016 in the energy and energy-services sector of the economy. The reasons for these are several.
First, 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 US-dollar terms than comparable US companies.
Second, there is 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.
Third, existing management teams in publicly-traded companies whose share price has not reached its potential often find it appealing to partner with a financial sponsor who can not only close the going public 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.
Finally, a growing number of public companies in the commodities space have been running strategic reviews for long periods of time, and, as a result, target board members (and target shareholders) may be more amenable to recommending (or accepting) a cash-out offer made by a private equity fund, if the transaction consideration is found to be fair, from a financial perspective.
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