CCS Income Trust units leapt by more than 20 per cent Friday morning, after founder and chief executive David Werklund unveiled a bid to take the Calgary oil-field services provider private in a $3.5-billion deal backed by a heavyweight investor group.
CCS said the group led by Mr. Werklund is offering $46 a unit for the business, although he will receive 50 cents less for the portion of his holdings that he plans to sell.
But at least one analyst figures CCS's boss and his backers are going to have to pay up to persuade unitholders to tender to the bid.
"We believe that there is a high probability that investors could demand a higher value to take this company private," Aleem Israel of Cormark Securities Inc. said in a note to clients, citing the Calgary firm's consistently high returns on capital and saying it is on the brink of a "massive growth opportunity" in the U.S. market.
Indeed, Mr. Israel figures it could take a bid of as much as $52 to pry the company out of its current unitholders' hands.
The investor group making the bid includes Goldman Sachs Capital Partners, Kelso & Co., Vestar Capital Partners, each of which will emerge with 16 per cent of the company, as will the combination of CAI Capital Partners and British Columbia Investment Management Corp. Mr. Werklund will be the largest shareholder, with 27 per cent, while O.S.S. Capital Management LP, will control around an 8 per cent stake.
The price the group is offering represents a 21.4 per cent premium to the units' closing price on the Toronto Stock Exchange Thursday, the trust said. It also is more than 12 per cent above the then all-time high $40.38 they hit last October.
Investors responded by driving the units up. At about 1.15 P.M. (EDT) they were trading at $45.74, up $7.85 or 20.7 per cent.
CCS has about 3,000 employees and operates through four divisions, providing a variety of services, including oil-field waste treatment and disposal and crude oil and condensate marketing services.
It tallied a profit of $40.7-million on revenue of $517.4-million in the first quarter, up from $35.2-million on revenue of $369.9-million a year earlier. However an increase in the number of units outstanding reduced unit profit to 72 cents from 82 cents.
Its return on equity has averaged 28.7 per cent over the past five years, according to Mr. Israel.
The planned deal is the latest - and among the largest - in a series of trust ownership changes that has followed Ottawa's surprise decision last fall that to start taxing them down the road, although Mr. Werklund said this in fact played a minor role in the move to take CSS private, a process that began in January.
"It's only one very small factor," he said when reached in Calgary. "Really the main driver is to create significant value and capture that value today."
The price works out to a little more than 12 times the trust's trailing earnings before interest , taxes, depreciation and amortization, according to CCS director Naveeen Daga, who has been acting as a financial adviser to Mr. Werklund and did not vote on the transaction. This compares with an average of just five to eight times EBITDA for most comparable companies, Mr. Daga said.
Mr. Werklund, who owns 26 per cent of CCS as currently constituted, will himself get a nice chunk of change if unitholders approve the bid.
Although he will reinvest 60 per cent or about $500-million of his CCS equity in the buyout, he will cash in the other 40 per cent. That will be worth about $330-million he said.
CCS's board of directors has unanimously approved the proposed transaction - "with interested and non-independent directors abstaining" - the trust said, after receiving a recommendation from a committee of independent directors.
"This transaction provides significant value and liquidity to our unitholders, as well as continuity and opportunity for all of our employees," Mr. Werklund, who plans to remain with the business as president and CEO, said in a statement.
The transaction requires approval by two-thirds of the votes to be cast by holders of CCS trust units and exchangeable shares at a special meeting to be held in September, as well as two-thirds of the votes of holders of exchangeable shares in CCS Inc., the trust said. It also must be approved by a simple majority of votes cast by unit- and share-holders excluding Mr. Werklund and other interested parties.
CCS also said that Gordon Vivian, who heads CCS's Concord Well Servicing division, which he co-founded with Mr. Werklund, will cash in 30 per cent of his holdings in the transaction and reinvest 70 per cent.
Mr. Werklund's backers would be paid a termination fee of two per cent of the transaction value in the event the income trust receives and accepts a higher offer.
A key reason Cormark's Mr. Israel thinks it will take a considerably sweeter bid - from the current group or someone else - is the attitudes of CCS's current owners.
"The shareholder base for this company in particular is very long-term in nature," he said in an interview. "So they're not thinking about just the next 12 months. They're thinking about what the three- to five-year growth line is for the company."
However, another analyst, who spoke on condition he not be identified, figures the premium to the market price is already enough to make it "very likely" that the deal will go through.
As for why Mr. Werklund and his backers are taking the plunge now, the analyst said: "I think the stock has a lot more value that's going to be created over the next couple of years, so they can take it private and keep the value for themselves, effectively."
Most of that additional value, the analyst added, will come from expansion in the United States. where CCS has made three small acquisitions in the last couple of years.
Mr. Werklund agreed that there are "great opportunities" south of the border but also said that CCS is being "cautious" because it does not know the U.S. market as well as Canada. He also said he still sees plenty of room for growth in the Canadian Sedimentary Basin.
Mr. Israel agrees the U.S. market would be riskier, but he also figures the oil-field services firm is up to the challenge. "Management has a superb track-record of making well-calculated investments," he said.