The company, which bought its first ship in April 2005, is based in Singapore where many of its potential customers are also located and the shipyards have the speed and flexibility required to carry out its business strategy. However, the company is registered in Cyprus, run by a team of Norwegians and listed on the over-the-counter exchange in Oslo.
The $185 million needed to increase the managementÆs combined stake from 11% to above 50% was obtained through a highly structured equity-linked issue arranged by Merrill Lynch, which continues to build on its reputation as a bank that prefers privately placed transactions over bulge-bracket public market deals.
Aside from bringing in nine other investors, Merrill also committed its own money to the deal through two separate entities, which market participants say would have helped to give other potential investors confidence in the transaction.
Such confidence would have been needed as the deal was completed in a record six weeks from the time the buyout was first suggested to founding CEO Idar Iversen in mid-January. At that time, he harboured no such plans û rather he was looking to do a straight-forward (and dilutive) equity placement to raise money for the next stage of development.
Once the CEO was convinced of the feasibility of him gaining control of the company he set up two years earlier, Merrill was literally working against the clock as one of the conditions for getting the initial selling shareholder to agree to the transaction was that the sale could be completed within 30 days. It didnÆt help that the Asian stockmarkets took a tumble during this time, but after a roadshow which allowed potential investors to meet with the CEO and hear his views about the upside potential of the company and the sector, they did commit to invest as much as $300 million into the buyout.
ôThere is not enough of these ships out there and everybody right now wants to do offshore exploration, be it in the Mediterranean, north of Libya, the Gulf of Mexico or in Asia,ö says a Merrill banker who worked on the deal. ôThe supply of drilling ships and oil rigs is incredibly constrained at the moment and the utilisation rate is at 100%. None of these things are spare anywhere,ö adds another.
Being traded at a price-to-earnings ratio of about three times and at an enterprise value to Ebitda ratio of 3-4 times, compared with 7-9 times EV/Ebitda for most of the comps in the sector, Neptune was showing clear signs of being undervalued, which made it a good candidate for a buyout.
Also of interest to investors was the fact that recent trade sales in the sector have been done at significant premiums, including the acquisition by Aban Singapore of the remaining 60% of a Norwegian-listed subsidiary in February, for which Merrill also arranged the financing. That transaction was done at an EV/Ebitda valuation of 10.8 times.
The final order book comprised a combination of hedge funds and sector specialists, who each bought an equal stake of the deal.
A key point with the transaction, which used an equity financing technique called ôcellsö (collateralised equity-leveraged loan securities), was to align the managementÆs goal for the company with that of the investors.
ôThis is subordinated money and therefore people really care about the equity future of the company. There is now very direct alignment between Idar and the rest of the management and the investors and they will participate side by side in equity upside,ö the banker notes.
The structure is similar to a convertible bond, with a basic bond-like return of Libor plus 900bp and equity upside on top. As the deal is subordinated, the equity component carry much more weight than the credit element, however, which is obvious as the investors will have access to the potential equity upside for up to 10 years even though the maturity of the bonds is only two years.
Under the deal terms, the equity upside will be realised through either an initial public offering, a high-yield debt recapitalisation scenario or through a trade sell. An IPO is probably the least likely, given that it would take the longest to complete, while a trade sale seems quite possible as the offshore drilling sector is already seeing a lot of M&A activity, with six deals in the past six months alone, says the Merrill Lynch banker.
The extension of the equity upside beyond the life of the bonds is a refinement of a similar deal structure that was used when Merrill arranged the financing for a leveraged buyout of IndonesiaÆs Berau Coal in August last year. In that deal investors had access to the equity upside only during the two-year life of the cells.
Here, the structure here is such that the investors should be able to achieve an internal rate of return of at least 20%, the bankers say. The proportion of the equity upside that investors will get will also increase gradually from 25% in the first two years to 30% after two years and 35% after four years.
The first leg of the buyout saw the management take over the 35% stake that was held by its single biggest shareholder û a Scandinavian hedge fund û at an agreed price of NOK143 per share, which was equal to 10 times its entry level. It also represented a premium of about 30% to the market price, which in late January was hovering around NOK110.
At this point it also bought a 5% stake held by Merrill Lynch, which lifted the managementÆs stake, through a company called Prime Point Holdings, to 51% and gave it full control.
The hedge fund, which had also been approached by other strategic investors interested in its stake, agreed to sell only on the condition of the 30-day completion period and if the management extended the offer to the companyÆs close to 90 minority shareholders as well. Many of them had bought into the company at same time and price as the hedge fund.
ôSo, what we had to do was to raise enough money to buy the entire company, but in the knowledge that we probably wouldnÆt end up doing that,ö one of the Merrill banker says. ôBasically we needed $165 million to buy out the hedge fund and close to $300 million to buy the whole thing.ö
The second leg of the deal thus saw the management make the offer available to all shareholders, but the interest to sell was low and when the offer closed at the end of last week it had accumulated only another 5%, bringing its total stake to 55% and the combined acquisition cost to $185 million.
NeptuneÆs business plan is to buy old drilling ships cheap, refurbish them so that they become state of the art vessels and then lease them out to oil companies on a full-service basis, with crew and all. It currently owns two ships, of which one is in service with a Vietnam unit of RussiaÆs Gazprom under a contract that will expire in August. Neptune is in discussions with about 11 oil producers to contract it out again by September.
The refurbishment of its second ship will finish next month at which time it will be rented out to IndiaÆs Reliance Petroleum under a three-year operating contract. The company is also currently looking at another acquisition project.
By buying old ships instead of commissioning new ones Neptune is able to shorten the usual three-year delivery time by about half, which means it can start to earn revenues much earlier. It bought its current two ships for about $14 million (when they were about 30 years old) and spent a couple of hundred million dollars to do them up and fit them out. They now have a combined market value of $500 million to $600 million.
ôThere is immense value creation from doing this,ö notes the banker.
NeptuneÆs share price jumped 17.6% to NOK127 in a single day in mid-February after the company announced it had been approached about a takeover of the company. Since then it has risen further to match the offer price. It is currently quoted exactly at NOK143.
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