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ShawCor Bid Seen at Highest Value on Gas Demand: Real M&A

Record natural-gas prices in Asia mean that a takeover of Canada’s ShawCor Ltd. (SCL/A) at the most expensive valuation ever in the gas-services industry would be worth every penny.

ShawCor, which makes coatings to help pipelines resist corrosion and handle high pressures, said last week that its controlling shareholder would consider supporting a sale. While ShawCor would be the priciest oil- and gas-services takeover in North America relative to trailing 12-month profit, the Toronto- based company is projected to more than double its earnings before interest, taxes, depreciation and amortization to a record by next year, according to data compiled by Bloomberg.

With profit driven by rising fuel demand in Asia and a backlog of orders to coat pipes that transport liquefied natural gas to the region, ShawCor is trading at the industry’s cheapest 2013 Ebitda multiple. Royal Bank of Canada says the C$2.95 billion ($3.03 billion) company may appeal to Tenaris SA (TEN) or Vallourec SA, while shareholder Bluewater Investment Management Inc. said its rising free cash flow could also draw private- equity bids. ShawCor may fetch C$47 to C$60 a share, according to Toronto-Dominion Bank, as much as a 43 percent premium.

“ShawCor is in the sweet spot right now,” John Goldsmith, vice president of Canadian equities at Montrusco Bolton Investments Inc., which oversees C$5.1 billion including ShawCor shares, said in a telephone interview from Toronto. The company “has built up a massive backlog on the back of these very large LNG projects in Asia Pacific. By coating the pipes, ShawCor provides a key link.”

Controlling Shareholder

Today, ShawCor shares rose 2.4 percent to C$43.06, the highest closing price since at least 1988.

ShawCor, which evolved from a construction company in the 1930s, makes coatings that protect and add weight to pipelines used to ship fuel from deepwater drilling sites. Its customers include major oil and gas producers and pipeline owners.

The board formed a committee to review alternatives after Chairman Virginia Shaw, who controls almost 92 percent of the class B shares that have 10 times the voting power of the class A stock, told directors that she’s prepared to consider selling her stake as part of a sale of the entire company. The class A shares rose 20 percent on Sept. 6 after the news was disclosed in a press release, bringing the stock’s gain to 71 percent in the last year.

As it canvasses for interested bidders, ShawCor said it has yet to hold any talks and no proposals have been made. The company also said it hired Credit Suisse Group AG as a financial adviser. Gary Love, ShawCor’s chief financial officer, yesterday declined to comment beyond the statement.

Asian Demand

“This comes as a bolt out of the blue,” Dennis Starritt, a Toronto-based money manager at Bluewater, which oversees about C$1.25 billion including ShawCor shares, said in a phone interview. “They seem to be just about at the top of their game right now.”

ShawCor stock accounts for 5.6 percent of the Mackenzie Universal Canadian Growth Class (MKUCGCCL) fund that Starritt co-manages. That’s the largest percentage of any fund that owns ShawCor, according to data compiled by Bloomberg.

As China requires more sources of energy to support the world’s fastest-growing economy, there is a greater need for pipelines that can transport liquefied natural gas, said Montrusco Bolton’s Goldsmith. That also means demand is on the rise for ShawCor’s services, he said.

“ShawCor coats the steel pipes so that they’re quasi- indestructible at extreme depths,” Goldsmith said. “They’re benefitting the same way that energy drillers are benefitting from demand. The idea is to get this natural gas to China, Japan and Korea.”

Gas Prices

The increased demand has led to peak prices for the fuel, in U.S. dollar terms. Japan’s average import price for natural gas in June, the latest month for which data is available for the Asian benchmark, was $17.30 per million British thermal units, the highest on record, according to data compiled by Bloomberg that dates back to 1999.

With ShawCor’s order backlog for new pipe-coating contracts at an all-time high of C$749 million, analysts project that Ebitda will rise 126 percent to a record C$334 million in 2013 from the level in the most recent 12 months, estimates compiled by Bloomberg show.

“It’s a very appealing asset,” Dan MacDonald, a Calgary- based analyst at RBC, said in a phone interview. The potential growth “helps de-risk the earnings stream that the acquirer would be paying for in a cyclical business.”

Highest Multiple

MacDonald said a takeover offer would likely have to top his share-price estimate of C$45, which he projects the stock can reach if ShawCor remains a standalone company.

Based on takeout multiples in comparable transactions, ShawCor could be acquired for C$47 to C$60 a share, Scott Treadwell, a Calgary-based analyst with Toronto-Dominion, wrote in a note to clients on Sept. 10. That implies a premium of 12 percent to 43 percent to yesterday’s close of C$42.05.

A takeover at C$47 a share would value ShawCor at about C$2.92 billion after subtracting net cash, or 19.8 times its Ebitda in the last 12 months. That would be the highest multiple on record of any deal in the North American oil- and gas- services industry valued at more than $1 billion, data compiled by Bloomberg show.

“It would look expensive on trailing multiples because 2011 and the first half of 2012 has been a slower time as it waited to ramp up on the projects it has captured,” RBC’s MacDonald said. Still, “I would think it’s worth it for a buyer to be paying up,” he said.

Private Equity

The company’s projected earnings growth makes a deal more affordable. Its current enterprise value is only 7.7 times estimated 2013 Ebitda, the cheapest among every North American midstream oil and gas company with a market value higher than $1 billion, the data show.

Shaw, who succeeded her father as chairman in 2007, will need to agree to any buyer or takeover price, and she hasn’t made a final decision on selling her shares, the company said in last week’s statement. Analysts also project that the stock can rise to C$47.20 on its own in the next 12 months, based on the average of estimates compiled by Bloomberg.

While those may be obstacles to a deal, Bluewater’s Starritt said private-equity firms may be lured by ShawCor’s balance sheet and the amount of cash its operations generate after deducting capital expenses. The business also doesn’t require a lot of capital, he said.

‘Cash Cushion’

ShawCor had no long-term debt and only C$8.65 million in short-term borrowings at the end of the second quarter, leaving it with about $C381 million in net cash, data compiled by Bloomberg show.

The business throws off more cash relative to its stock price than 98 percent of its peers, the data show. Only Sunoco Logistics Partners LP’s free-cash-flow yield of 8.76 percent topped ShawCor’s 8.75 percent.

“They have quite a cash cushion,” Starritt said in a phone interview. “They don’t have huge investment needs compared to the kind of profitability they can generate.”

ShawCor may be an appealing acquisition target for Tenaris, the world’s largest maker of seamless pipes, and Vallourec (VK), which makes steel pipes for the oil and gas industry, said RBC’s MacDonald. National Oilwell Varco Inc. (NOV), the largest U.S. maker of oilfield equipment, would also be among the logical buyers, according to MacDonald and a Sept. 6 note from Bank of Montreal analyst Bert Powell.

Representatives for Luxembourg-based Tenaris and Boulogne Billancourt, France-based Vallourec didn’t respond to requests for comment outside normal business hours. A spokesman for Houston-based National Oilwell also didn’t respond.

“ShawCor is the global leader in pipe coating,” MacDonald said. “That makes it a very appealing asset, and then specifically its exposure to the subsea offshore development, which in our view is likely the best secular growth trend within oilfield services.”

To contact the reporter on this story: Tara Lachapelle in New York at tlachapelle@bloomberg.net.

To contact the editor responsible for this story: Sarah Rabil at srabil@bloomberg.net.

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