ShawCor Ltd. has a stable balance sheet, strong fundamentals and a claim on the title of largest pipe-coating provider on the planet – all attributes that will make it attractive to a wide swath of potential buyers who analysts say could pay as much as $4-billion.
According to analyst research, private equity firms should demonstrate some interest now that a sale may be in ShawCor's future. Industry buyers involved in oil and gas, as well as engineering, are also likely to sniff around. Big names such as General Electric Co. and National Oilwell Varco have been tossed out as good matches for the company.
ShawCor announced on Wednesday that the chair of the board of directors, Virginia Shaw, might consider selling her controlling stake, and the board had "formed a committee to consider a sale and other alternatives."
Ms. Shaw has a deep personal connection to the company, which was expanded by her forebears from a general construction company in southwestern Ontario to a global energy services company. ShawCor is now a worldwide leader in products and services for the pipeline, petrochemical and industrial segments of the oil and gas industry, operating through seven subsidiaries in more than 20 countries.
How badly does Ms. Shaw want to sell her shares? That's not yet clear. But while her motivation is still a mystery, some analysts say that Ms. Shaw's exit would at least make a company sale possible. With 63.3 per cent of the company votes held by her, the current share structure has likely warded off takeover attempts.
"We would point out that M&A activity in the space has picked up recently and this may be an opportunity for the board to maximize shareholder value while the market remains strong," analyst Bert Powell of BMO Nesbitt Burns wrote in a note Wednesday. He viewed the announcement as potentially positive.
So, if the move looks good for shareholders, who are potential purchasers? "We would see the possible buyers as a fairly broad mix," says Dan MacDonald, analyst with RBC Capital Markets. That's an understatement. Prospective buyers fall into three broad categories.
The first would be one of the world's big oil field services and equipment companies. This group is comprised of firms such as GE, National Oilwell Varco, Halliburton Co. and Schlumberger Ltd. "The fact that ShawCor is likely moving into the most prolific growth period in its history would suggest that there could be a number of interested, offshore technology or pipeline focused companies," wrote Dana Benner, managing director of institutional equity research, oilfield services, at AltaCorp Capital, in a note to clients.
Analysts also like the odds that some large engineering, procurement and construction-type companies will be interested – especially ones that are involved in the offshore space. Names tossed out include Italian oil and gas contractor (and pipeline designer) Saipem, seabed-to-surface energy contractor Subsea 7, and other engineering companies such as Aker Solutions and Technip.
Private equity firms, too, are expected to take a close look at picking up ShawCor. "Given the company's clean balance sheet, and its strong free cash flow profile, we'd expect some interest there," said Mr. MacDonald. The company wrapped up the quarter without bank debt and with about $3.30-per-share in cash, which could make it an attractive target.
With so many possible buyers, and so few comparatives, it's almost easiest to start by eliminating companies that are unlikely to bid. Direct competitors, for one, are out. ShawCor has such an extensive presence in the market that there would likely be Competition Bureau troubles if two tried to join. Plus, customers might then actively promote other competitors in an effort to keep prices down, which would not be good for the firm.
The last question mark is over valuation. It's a bit of a guessing game trying to figure out what the company could sell for. ShawCor has a market cap of roughly $2.96-billion with the stock trading at about $42 after the announcement, up roughly 20 per cent on the news. The price suggestions range from the low-$40 mark, to the upper-$50s, with most falling somewhere in the middle. AltaCorp, for example, applied a price-earnings multiple of 16.3 (based on U.S. medians for oilfields services deals) to arrive at a possible take out figure of $53.47.
Some analysts placed extra value on the visibility of the demand for ShawCor's products, considering the 2014 fiscal year is looking to be at least as good as 2013. The fact that ShawCor's backlog hit $749-million in the company's second quarter, and the anticipation of further backlog in the rest of the year, may be worth a premium to an acquirer.
ShawCor's strategic review process could take months, so there will be plenty of time to iron out exact valuations, but as Mr. Benner writes in his note, "The market is likely to begin pricing in take-out valuations, which could make it hard for the independent directors to say no to a wide range of potential, premium-bid offers."