Weir Group Regulatory News (WEIR)

21 Jun 2007 07:01

Weir Group PLC21 June 2007 The Weir Group PLC 21 June 2007 Acquisition of SPM Flow Control, Inc. The Weir Group PLC ("Weir" or "the Group"), is pleased to announce that it hasagreed to acquire SPM Flow Control, Inc ("SPM") for US$653 million (£328 million). Anticipated revenues for calendar year 2007 are US$ 320 million (£161million). SPM, based in Fort Worth, Texas, is a leading manufacturer of high-pressure wellservice pumps and related flow control equipment, which operate in abrasive,high-wear applications in oil and gas drilling and extraction. The acquisition of SPM provides a new platform for growth in an end-market andarea that Weir understands well. Weir is confident that this acquisitionprovides significant strategic, operational and financial benefits, including: • increased presence in the higher-growth upstream oil and gas market, with a particularly strong position in the high-demand well stimulation niche; • a business model that is increasingly aftermarket-driven, as the installed base of SPM's well service pumps grows; • potential to increase sales of both SPM's and Weir's existing engineering services and products across the broader business platform of the enlarged group; • opportunity in the medium term to enhance SPM's productivity through the application of Weir's lean process initiatives and production skills; and, • immediate earnings enhancement and an expected return in excess of the Group's cost of capital within three years. Higher energy prices have driven an increase in oil and gas well developmentwhich, when coupled with the increasing use of well stimulation techniques toenhance hydrocarbon output, has resulted in strong demand for SPM's portfolio ofspecialised well service products. The consideration of US$653 million will be paid in cash on completion and willbe satisfied by a combination of new and existing bank facilities and availablecash balances. The acquisition is subject to the approval of Weir's shareholders at anextraordinary general meeting ("EGM") expected to take place in mid July 2007. Weir's chief executive, Mark Selway, commented:"SPM is an exceptionally well-aligned business in a sector in which we have beenmost eager to grow. It ticks all the right boxes for us. SPM has a great marketposition in a core sector for Weir and we have good potential to improve thebusiness through our operational expertise, geographic profile and financialstrength. We are confident that the medium term operational benefits andextended market opportunities will generate significant value for ourshareholders." An analysts' meeting to discuss the acquisition will be held today Thursday 21June 2007 at 0930 hours at Room 80, UBS, 7th Floor, 1 Finsbury Avenue, London,EC2M 2PP. Contact details:The Weir Group PLC Tel. 0141 637 7111Mark Selway, Chief ExecutiveKeith Cochrane, Finance DirectorHelen Walker, Public Relations Manager Tel. 0141 308 3739 (Mobile: 07789 032296) Maitland Tel. 020 7379 5151Suzanne Bartch (Mobile: 07769 710 335)Peter Ogden (Mobile: 07811 124 197) THE WEIR GROUP PLC ACQUISITION OF SPM FLOW CONTROL, INC. 1. Introduction Weir has entered into an agreement to acquire SPM for US$653 million (£328million) in cash. SPM, based in Fort Worth, Texas, is a leading manufacturer of high-pressure wellservice pumps and other related flow control equipment, which operate inabrasive, high-wear, applications in oil and gas drilling and extraction. The acquisition is conditional on the approval of Weir's shareholders at an EGM.A circular containing a notice convening this meeting is expected to be postedshortly. 2. Background to and reasons for the proposed acquisition Strategy In 2002, Weir outlined its strategy to realign the portfolio of Groupbusinesses: to exit lower margin activities, restructure underperformingbusinesses and achieve growth in higher-demand, higher-margin sectors. At thesame time, the Group implemented the Weir Production System, a structuredprocess geared to maximise operational performance. The benefits of thisstrategy were evident in the results for 2006, published on 21 March 2007,showing a 40 per cent year-on-year increase in pre-exceptional profit beforetax. 80 per cent of the Group's £1.1 billion order input in 2006 was generatedfrom its core markets of mining, oil and gas, power generation, marine anddefence. The Group's strong cash generation and balance sheet capacity have provided itwith the flexibility to pursue growth through acquisitions aligned with its corebusinesses. The Company's strategic acquisition criteria require targetcompanies to be centred on engineering products and services. Characteristicssought in any acquisition include a strong position in a high-growth segment,high aftermarket content, a technological edge, an international market presencewith scope for expansion, and sound profitability. SPM satisfies all of thesecriteria. SPM's positive market outlook A key driver of demand for SPM's products is the level of hydrocarbonexploration and production activity. The independent research undertaken forWeir indicates that the number of new oil and gas wells is expected to continueto grow and identifies a continuing shift towards 'unconventional' wells, whichrequire more intensive use of the specialised products supplied by SPM. Strategic fit and benefits of the proposed acquisition The proposed acquisition meets Weir's acquisition criteria and provides theenlarged Group with significant strategic and operational benefits.Specifically, SPM presents: • increased presence in the higher-growth upstream oil and gas market, with a particularly strong position in the high-demand well stimulation niche; • a business model that is increasingly aftermarket-driven, as the installed base of SPM's well service pumps grows; • potential to increase sales of both SPM's and the Group's existing engineering services and products across the broader business platform of the enlarged Group; and, • opportunity in the medium-term to enhance SPM's productivity through the application of the Group's lean process initiatives and production skills. The exceptional growth experienced by SPM in recent years means that the Group'splans for SPM include investment in upgraded business systems, improved plantlayout and a significant strengthening of related management disciplines. Inaddition, the extensive access to operations provided during due diligenceindicates that it will be necessary to increase staffing to a level moreappropriate for a business of SPM's scale. The Group is also anticipatingadjustment to component prices, reflecting US dollar weakness. Although thesefactors will increase SPM's cost base, they are necessary to strengthen thebusiness, improve operational efficiency for profitable growth and prepare thebusiness for the longer term. The Group is confident that its proven capabilities of Weir's business modelwill deliver effective integration without undue disruption to either business. 3. Information on SPM SPM's pump products and associated spare parts account for 72 per cent ofrevenue and are largely employed in the well stimulation technique, used toincrease output from oil and gas wells that might otherwise be uneconomic. Thenumber of wells drilled globally has risen by almost 50 per cent from 2003 to2006, while pumping horsepower applied to the well stimulation process ofhydraulic fracturing in North America has grown by 67 per cent over the sameperiod. Beyond hydraulic fracturing, SPM's pumps have application in pressuriseddelivery at the wellhead of wellcasing cement and drilling mud. SPM's other flow control products provide 20 per cent of revenue and includevalves, chokes, manifolds, swivel joints and connectors. SPM is one of the fewsuppliers of both the pump and a full range of flow control products fordeployment between the well service unit and wellhead. The 8 per cent balance of SPM's revenue derives from the provision of relatedmobile recertification, refurbishment and equipment rental services. The materials generally pumped to stimulate well output consist of an aggressivemix of water, chemicals and sand, which imposes high wear on equipment. SPMmanagement estimates that aftermarket activities, including spare parts,replacement equipment and service, today represent approximately 45 per cent ofSPM's total revenues. Most of SPM's revenues relate to onshore hydrocarbon production with,geographically, the United States accounting for approximately 66 per cent ofrevenues, Canada 22 per cent, Europe 7 per cent, Asia and Far East 4 percent and1 per cent from the rest of the world. Customers include manufacturers of well service equipment, well serviceoperators, drilling contractors, oilfield supply houses and integrated oilcompanies. The top 10 customers, which include leading names in these sectors,represented around 70 per cent of calendar 2006 revenues. SPM has a consistent history of repeat business from its customers, withresearch independently conducted on behalf of Weir confirming that: • in the pumps market, SPM outperforms competitors in product quality and customer service, two of the most important purchasing criteria; • customers are generally unwilling to source from unproven manufacturers due to the risk to production from the well; and, • to a large degree, customers return to the original equipment provider for replacement parts. SPM's head office and principal manufacturing plant, comprising fabrication,machining, assembly, testing and service facilities, are located on a 12-acresite in Fort Worth, Texas. SPM has ten other service centres, three in Canada,two in Texas, and one each in Colorado, Louisiana, West Virginia, Scotland andDubai. All facilities are leased, with the exception of the administrationbuilding in Fort Worth and the Aberdeen service centre. The Fort Worth plantsand Texas service centres are leased from an entity which is controlled bycertain of the current owners of SPM. Weir will continue to lease the Texasproperties on normal market terms for a period of 4 years. As at the end of December 2006, SPM had some 631 employees, of whom 482 werebased at Fort Worth. SPM is owned by its current chief executive, Dan Lowrance, and associated familyinterests. At completion, Mr. Lowrance will retire from SPM but will continue ina consultancy role to the enlarged group on an ongoing basis. It is intendedthat he will be succeeded by Steve Noon, a senior executive employed by Weir,who will report directly to the Group's chief executive, Mark Selway. The seniormanagement team will be further supplemented by Group manufacturing and businesssystems specialists. Appropriate retention and incentive arrangements have beenput in place for the senior management team. Following integration, SPM will beconsolidated within the Clear Liquid operations of Weir's Engineering Productsdivision. 4. Summary financial information SPM had gross assets at 31 March 2007 of US$155.7 million (£78.2 million) andprofits before tax for the nine months ended 31 March 2007 of US$60.4 million(£30.4 million). The net assets being acquired by the Group include net cashbalances of US$2.9 million as at 31 March 2007. SPM's revenue, EBITDA, operating profit, profit before tax and net profit aftertax, for the three years ended 30 June 2006, together with comparative figuresfor the nine months ended 31 March 2007, are summarised below. US$millions Year ended Year ended Year ended 9 months ended 30 June 2004 30 June 2005 30 June 2006 31 March 2007 Revenues 55.8 78.8 140.6 208.6 EBITDA 8.6 12.6 43.0 62.6 Operating profit* 6.8 10.4 40.5 60.5 Profit before tax 6.5 10.0 40.1 60.4 Net profit after tax 4.7 6.2 26.9 39.9 *Operating profit in 2006 includes exceptional income of US$8.0 million representing the settlement of a claim against a supplier. The financial information reflects SPM's success in the last three years, withrevenue increasing from US$56 million in the year ended 30 June 2004 to US$141million in the year to 30 June 2006. Higher energy prices, particularly for US domestic gas, have driven an increasein oil and gas well development, partially compensating for historicalunderinvestment in the industry. This, when coupled to the increased use of wellstimulation technologies, has resulted in strong demand for SPM's specialisedportfolio of well service products. SPM's growth has continued in the nine months to 31 March 2007, with revenue ofUS$209 million and operating profits of US$60.5 million. These results havebenefited from a US$6 million positive cost impact of delayed infrastructurespending and favourable component pricing which is not expected to be sustained. 5. Principal terms and conditions of the proposed acquisition The proposed acquisition is of the entire issued share capital of SPM and isconditional on the approval of the shareholders of Weir. If Weir does not obtainthis approval, it is required to pay to the shareholders of SPM a break-fee ofthe lesser of US$30 million and an amount equal to 0.99 per cent of the marketcapitalisation of Weir based on the closing market price on the London StockExchange on 20 June 2007. The Group and SPM intend to make all relevant filings under the United StatesHart-Scott-Rodino Anti-trust Improvements Act of 1976, as amended. The sale and purchase agreement contains warranties of a type customary in theUSA for a transaction of this nature. 6. Funding the proposed acquisition Two of the group's principal lending banks, RBS and HSBC, have provided newunderwritten facilities totalling £550m to support the acquisition of SPM, underagreements dated 20 June 2007. The acquisition will be funded from a combinationof the new and existing facilities together with available cash balances. 7. Current trading and prospects for the enlarged Group The Group's current trading is in line with the Directors' expectations and isconsistent with the comments made in the AGM statement released on 9 May 2007:"the Group has started the year well, even against the strong first quarter oflast year and it views the outcome for the year as a whole with confidence". Based on SPM's current order book, due diligence work on its order prospects andthe independent market research undertaken by the Group, it is a reasonableassumption to expect revenues of the order of $320 million in calendar year2007, some 15 per cent ahead of actual revenues for the nine months to 31 March2007 pro-rata on an annual basis. Future operating margins are expected toreflect the absence of favourable items in the prior period which we anticipatewill progressively normalise to 2006 levels (excluding exceptional income)when taking into account current purchase cost factors and the need to increase infrastructure spending to support recent business growth. The proposed acquisition is expected to be immediately earnings enhancing for Weir and to generate a return in excess of the Group's cost of capital within three years. 8. Shareholder circular and outline timetable Weir intends shortly to send a circular to shareholders giving full details ofthe acquisition and including notice of the EGM to consider it. The EGM isexpected to take place in mid July 2007 with completion of the acquisition,subject to shareholder approval, expected shortly thereafter. Note 1: References to US$/£ exchange rates use the exchange rate of 1.99 as at 19 June 2007. Note 2: All references to percentage contribution to revenue in section 3 relate to the period 9 months ended 31 March 2007. Note 3: Under US legislation, SPM's financial statements are not required to be audited, and were subject to audit only at SPM's request in 2007. Both the accountant's opinion contained within the accountants report and the auditors report on SPM's financial statements are modified for the three years to 30 June 2006, as the evidence available to them in respect of inventory was limited because the counting of the physical inventory was not observed by an auditor. Owing to the nature of SPM's records, the reporting accountants were unable to obtain sufficient appropriate evidence regarding inventory quantities by using other procedures. This modification only relates to inventory and is not significant to shareholders because SPM, observed by Weir and the reporting accountants, undertook a full inventory count as at 31 March 2007. In consequence, the Directors are able to recommend the proposed acquisition notwithstanding the modified accountants report as the full inventory count was performed and provided adequate assurance over quantity and valuation to give a true and fair opinion of the balance sheet as at 31 March 2007. The financial information for the nine months ended 31 March 2007, as included in the accountants report, is qualified therefore only in respect of opening inventory. This information is provided by RNS The company news service from the London Stock Exchange