Dover's Breakup Plan Has Goodies for Dan Loeb
For Dover Corp.'s sake, let's hope it's still engaged in negotiation tactics.
The industrial conglomerate announced Thursday evening it will spin off its oilfield services business, known as Wellsite, into a separate company. This ends a strategic review begun in September, so Dover's exit from the business isn't a surprise.
The manner of that exit is somewhat surprising, though. While a spinoff was always an option, an acquisition of Wellsite by another oilfield services company seemed a distinct possibility.
The core of the business is "artificial lift," or equipment such as submersible pumps designed to squeeze more oil from wells after they've been drilled and completed. With U.S. rig counts heading up and a huge backlog of drilled-but-uncompleted wells in the background, Dover's energy business looked like a decent candidate to be picked up by the likes of Halliburton Co., General Electric Co.'s Baker Hughes business, or Oil States International Inc.
The apparent lack of a deal -- at an acceptable price, anyway -- may reflect an oilfield services sector that has simply lost its mojo. The latest oil rally has done little for stocks and potential suitors may feel reluctant to do even a bolt-on deal right now.
It's favorable tax-wise, but a spinoff seems a sub-optimal exit for Dover. While Wellsite's Ebitda is estimated at $250 million this year, the costs of becoming and running a stand-alone company will absorb $35 million of that. Assume a third of that is ongoing, and underlying earnings are about $238 million. If you further assume earnings increase by 10 percent to 15 percent next year, you end up with a valuation for the business of about $3.4 billion, based on a sector average Ebitda multiple of about 12.7 times. That isn't bad, but also isn't cash in the door and is less than what a sale might have fetched.
One thing potentially weighing on Wellsite's valuation will be debt. Dover plans to extract $700 million to $800 million of cash via a dividend recapitalization of the energy business. Consequently, Wellsite will leave home with leverage potentially about 3.4 times underlying Ebitda, at the top end of the peer range, although Dover claims the energy business's free cash flow will give it financial flexibility.
That dividend is to fund a $1 billion buyback that Dover also announced Thursday. Dover, whose forward Ebitda multiple is in line with a basket of multi-industrial peers and whose share price is near an all-time high, doesn't necessarily need a $1 billion share buyback.
In that context, it smacks of an effort to appease activist investor Third Point LLC, which disclosed a stake in Dover in October. It's not clear if Dan Loeb's involvement is what pushed Dover to initiate the strategic review of the energy business, or if he just piggy-backed on an existing plan (for what it's worth, analysts and Gadfly had been speculating about a breakup for months.)
Either way, Third Point seemed to lean more toward an outright sale of Wellsite unit, saying this in its third-quarter investor letter:
The strong cash flow generation, recurring parts and service revenue, and margin profile of the Dover energy segment will make it an attractive strategic target to many buyers.
The buyback may, therefore, be a sweetener to offset any disappointment around doing a spinoff instead. Another seeming concession to Third Point is Dover's concurrent promise on Thursday to expand its "rightsizing initiatives." Dover now targets $50 million of savings in 2018, up $10 million from its previous target.
While not the best outcome, spinning off Wellsite does at least fulfill the goal of simplifying Dover. Having shares trading in the marketplace will also establish a clear valuation of the energy business, giving shareholders exposure to a potential recovery in the sector and perhaps teeing up an eventual acquisition.
For the real optimists -- or cynics -- among us, though, there's always the possibility that Dover's "final" decision also represents one last attempt to scare up a suitor.
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