Private equity took a big bite out of Alberta's energy service trust sector yesterday, as Calgary-based CCS Income Trust agreed to a $3.5-billion takeover deal with a consortium led by its chief executive officer.
The deal is by far the largest private takeover in the energy trust sector since the Canadian government announced it would make income trusts pay corporate tax, and comes only one week after the decision effectively became law. As such, it appears to provide more backing to the theory that private equity is seeking out juicy assets within Canada's energy services sector, according to industry observers.
"The trusts are being taken out at quite a rate, and now even big names like CCS are being targeted," said Gordon Tait, managing director at BMO Nesbitt Burns Inc. "Trusts are designed to generate free cash flow, and that's what private equity needs to finance the debt they assume to make acquisitions - so it all makes sense."
The takeover consortium for CCS, which provides services in Canada and the U.S. that include oil field waste management, crude oil marketing and well completions, is led by CEO David Werklund, who will retain that position at the private company, and includes Goldman Sachs Group Inc., Kelso & Co., CAI Capital Partners, Vestar Capital Partners, British Columbia Investment Management Corp. and O.S.S. Capital Management LP.
Unitholders will receive $46 a unit, a premium of 21 per cent to CCS's closing price Thursday of $37.89 on the Toronto Stock Exchange, while Mr. Werklund will receive $45.50 per unit. The deal, which has been approved by the CCS board, will close in the fourth quarter of 2007 if approved by shareholders.
"The transaction provides value and liquidity for unitholders," said Mr. Werklund in an interview. "[The government tax decision]was a factor, but our responsibility to recognize the value of this opportunity was really the driver behind the move."
Taking the company private is advantageous as it creates additional taxable deductions for unitholders, creating a higher return on capital, said Naveen Dargan, a CCS director and financial adviser to Mr. Werklund.
While the income tax decision is believed to have made many trusts in various sectors more attractive as potential takeover targets by knocking down their stock price, Canada's energy service firms are seen as being particularly at risk, given the difficulties the sector has endured elsewhere.
Lower gas prices and higher costs have crippled demand for drilling in Western Canada, with the number of rigs in service hitting a seven-year low for the time of year last week, knocking the stock prices of sector leaders such as Precision Drilling Trust and Savanna Energy Services Corp.
However, CCS's price has held up better than many of its rivals, a situation attributable to the firm's focus on environment services such as waste management rather than drilling, Mr. Werklend said.
The company is now investigating opportunities to expand in the U.S., where it has made three small acquisitions in the last couple of years, he added.
CCS INCOME TRUST
Close: $45.80, up $7.91