Stewart & Stevenson LLC, Houston’s 115-year-old oil and gas distribution and parts manufacturer, has agreed to sell its business to Kirby Corp. (NYSE: KEX) for $710 million in a deal signed June 13.

Kirby said it expects $25 million in cost synergies to come from the acquisition, which will be somewhat accretive in 2017 and more so in 2018.

The deal comes during an uptick of oilfield service and supply A&D activity, including recent deals by Key Energy Services Inc. (NYSE: KEG) and Weir Oil & Gas’ $114 million acquisition of KOP Surface Products, which serves the South East Asian markets and the Middle East.

Tudor, Pickering, Holt & Co. (TPH) said in a June 14 note that its analysts “don’t get too hung up on public oilfield service company valuations not looking ‘cheap’ on 2017/2018 metrics–because valuation is more art [and strategy] than science at this point in [the] cycle.”

Along with large offshore deals announced in May, Keane Group Inc. (NYSE: FRAC) added pressure pumping services in the Permian Basin and Bakken for $284.5 million and National Oilwell Varco LP (NYSE: NOV) purchased drilling technologies from Flotek Industries Inc. (NYSE: FTK).

Kirby, a leading inland tank barge provider, “ultimately looks to dampen some of its through-cycle business variability via its pending acquisition of Stewart & Stevenson,” TPH said.

However, the timing of the transaction may bode well for Kirby’s primary manufacturing and remanufacturing pressure pumping spreads, which are “essentially fully booked from throughput capacity” through the end of 2017.

TPH estimates pressure pumping demand to increase by at least 5 million hydraulic horsepower during the next 18 months.

“Gaining access to Stewart & Stevenson’s oilfield manufacturing/assembly facilities here at the nascent stage of this oilfield service cyclical recovery will likely prove [in hindsight] to have been a shrewd move,” TPH said.

About 75% of Stewart & Stevenson’s revenues come from distribution services and 25% from manufacturing, said Sam Margolin, an analyst at Cowen and Co. The company has four manufacturing facilities that primarily serve the oil and gas industry while seven of its 31 other domestic facilities overlap with Kirby’s existing footprint.

Stewart & Stevenson has averaged $970 million in annual revenue and $64 million in annual EBITDA during the past six years, Margolin said. “The purchase price implies 11x EBITDA ex-synergies and 8x EBITDA with synergies fully realized.”

Kirby’s purchase of Stewart & Stevenson, a subsidiary of Parman Capital Group, will be funded through the company’s revolving credit facility and common stock valued at $355 million, subject to certain closing adjustments.

The full value of the transaction will ultimately be tax-deductible despite 50% equity funding, Margolin said.

Joseph H. Pyne, Kirby’s executive chairman, said Parman will become a major shareholder of the company and that the combination with Stewart & Stevenson has the potential to unlock strategic value.

The deal also creates a “larger organization at an opportune time, as the industry continues to recover from a deep downturn,” he said.

Kirby expects the acquisition to close in the third quarter, subject to customary closing conditions and Hart-Scott-Rodino Act approvals.

Founded in 1902, Stewart & Stevenson serves domestic and global markets with equipment, rental solutions, parts and service through a strategic network of sales and service centers in domestic and international locations.

Darren Barbee can be reached at dbarbee@hartenergy.com.

Comments