Inflexion leverages CGT changes in oil & gas buyout

The UK mid-market firm has paid only a seven times profit multiple to acquire an engineering company dependent on the oil and gas sector.

Inflexion Private Equity has bought SMD, a designer and manufacturer of subsea vehicle systems. Terms were undisclosed, but a source close to the deal said the transaction size was £70 million ($139.6 million; €89.3 million).

SMD: a work-class
ROV

SMD has profits of £10 million, the source said. The seven times profit multiple paid is far below standard valuations in the booming oil equipment services and distribution sector, where standard comparable multiples are 18.34 times and forecast to go down only to 16.4 times, according to data provider Digital Look. This sector has been driven forward by the spiralling prices of energy commodities, most notably the high price of oil which is valued at more than $100 (€64 million) per barrel.

Although the problems in the global credit markets have recently begun to impact on valuations, another factor helped Inflexion’s negotiations. The seller John Reece was keen to successfully complete the deal before the capital gains tax regime changes in the UK from 10 percent to 18 percent on 5 April, according to Inflexion’s Simon Turner.

The specific engineering niche in which SMD operates in also has high capital expenditure outlays, which are forecast to go up by 50 percent during the next three years and this may also have impacted on the company’s valuation. Turner said this is compensated for by the outlays acting as a barrier to entry for other participants.

Despite changing market conditions overall, Turner is confident the company will be isolated from wider problems in the worldwide financial markets. “The oil and gas sector is enjoying a very strong upswing and it’s a massive macroeconomic shift, which isn’t going to go away like it has in the past – because this time it’s demand driven.” A knock on effect of the strong demand is oil and gas producers are looking to extract from more difficult to reach places, driving the need for SMD’s technology, he said.

The company began producing work class ROVs, machines used for underwater work in the oil and gas industry, in 2003. Increased oil and gas exploration and offshore construction has driven significant revenue and earnings growth in recent years.

SMD has also branched out into offshore wind farm construction and subsea mining, leading to a £28 million contract to design and build two sealed mining machines for mining company Nautilus Minerals.

Barclays and HSBC financed the deal.

Inflexion bought mooring company Viking Gas in January 2006 for £22 million. Turner said the company has grown tenfold since acquisition, although it has yet to exit.

Private equity firms have continued to invest in the oil and gas sector despite the problems in the global credit markets. In the first quarter of 2008 the majority of the larger buyout firms have remained inactive, with only $1.16 billion generated in fees for investment banks. One of the few larger firms accelerating its investment pace, despite the credit market difficulties, was energy specialist First Reserve, which generated the most fees for investment banks, or $75 million, more than triple the amount it paid to banks in the first quarter of 2008.

There has also been a slew of deals by other firms in the sector, including last week’s C$625 million ($614 million, €329 million) consortium growth capital investment in Shelter Bay Energy, a Canadian oil and gas exploration company. The investors included energy specialist Riverstone, US bank Goldman Sachs and US mid-market firm Kelso & Co.