The proposed takeover of Saxon Energy Services raises all sorts of red flags, as the company contemplates cutting a deal at a thin premium, with enormous potential upside for its management.
Saxon revealed Monday that it is negotiating a $7-a-share buyout offer with a major customer, Schlumberger Ltd., and private equity fund First Reserve Corp., which focuses on energy plays.
Saxon has appointed a special committee to review any bid that comes - investment bank Thomas Weisel Partners is said to be advising the directors. The two potential buyers have been given exclusive negotiating rights until May 5 on a deal that would be worth $580-million.
The issues around this deal start with price. At $7, it's a thin premium to the $6 levels the stock traded at over the past month.
Value fund manager Irwin Michael at I.A. Michael Investment Counsel is a significant Saxon shareholder and highlighted the stock in a report this month - published before the takeover talks were revealed. Mr. Michael said: “Despite the solid financial and operating performance and ensuing share price rally, we believe that shares of Saxon Energy are still inexpensive.” With Saxon stock changing hands at just 7 times forecast 2008 EBITDA, Mr. Michael also warned that the company was a takeover target.
Raymond James analyst Andrew Bradford greeted the news of takeover talks by pumping up his target price on Saxon. He said in a report Tuesday: “Under a modest growth scenario, we think that Saxon's fair value is probably closer to between $7.50-8 per share.”
In addition to questions about the thin premium that Schlumberger and First Reserve contemplate paying, it's unusual for the target of a takeover to enter into exclusive talks with a buyer, as opposed to holding some sort of auction. Given this dynamic, any break fee Saxon agrees to should be subject to scrutiny, as should any agreements with the buyers that limit Saxon's ability to field rival offers.
Finally, there are reasons to be concerned with a deal that includes a private equity fund, as First Reserve's involvement means Saxon management has a bias in this deal since they will likely keep their jobs and get a slice of the equity in the new firm.
The fact that one private equity firm is knocking on Saxon's door speaks to growing interest in the sector. As Wellington Financial's blog pointed out Wednesday, there have been all sorts of buyouts involving energy services companies. Channelling a research report from none other than Thomas Weisel Partners, the blog noted: “The proliferation of private equity oil service deals amidst a commodity bull run seems surprising at first blush. However, value creation opportunities remain plentiful, which private equity is clearly noticing.”
