CCS Buyout will take a gem off the market

Oilfield service trust's strong results will be missed by investors

Peter Koven

Financial Post
Saturday, June 30, 2007

The barbarians at the gate bid for two very different Canadian public companies this week.

The one that got all the attention was Bell Canada Inc., the phone giant that has constantly frustrated investors with an immobilized stock price. Forget the "hollowing out" debate; if private equity firms are actually willing to offer $41 a share for this chronic underperformer, they can have it.

The other bid was much smaller, and for a more profitable investment. CCS Income Trust announced yesterday that it has agreed to a $3.5-billion management-led buyout that includes a small army of private equity players: CAI Capital Partners, Goldman Sachs Capital Partners, Kelso & Co., Vestar Capital Partners, British Columbia Investment Management Corporation and O.S.S. Capital Management L.P.

Calgary-based CCS has been a great success by any measure. The oilfield services and waste management firm has hiked its distributions 13 times since becoming a trust in 2002. Its return on equity has averaged nearly 30% a year in that time. And the units have performed extremely well, even bouncing back from Mr. Flaherty's "Halloween Massacre" last year in a matter of weeks. "Most service companies have done well selling a largely undifferentiated product, but CCS is almost irreplaceable," says Kevin Lo, an analyst at First-Energy Capital. "Those are really, really strong assets."

Energy services companies are not the typical stomping ground for leveraged buyouts, because they face seasonal and cyclical fluctuations that can make them poor places to park a lot of debt. But CCS has a dominant position in energy waste management services, essentially controlling the market in Western Canada alongside Newalta Income Fund. That is a stable business, which makes CCS less cyclical than competitors that only do oilfield servicing. CCS also has unusually high free cash flow, which can make the debt financing easier for private equity players.

And analysts said CCS is poised for significant growth in both Canada and the United States, where it is only starting to get a foothold.

"With management being involved and taking a longer-term view of the story, I can certainly see how [a buyout] makes sense. They have tremendous opportunities ahead of them," says Jeff Fetterly of CIBC World Markets.

Those are opportunities that small investors are not going to get to partake in. Unless, of course, they reject the takeover offer. But with a 21% premium thrown in, the deal will probably be approved, at this price or a slightly higher one.

"What portfolio manager doesn't want to show that premium on his books?" asked one analyst. "It's probably going to happen. But I think shareholders might lose out in the long term."

Of course, CCS will probably be back one day. Taking the company private allows the new owners to make the tax structure more efficient with the trust tax looming in 2011, analysts said. They can groom new management and take it public down the road at a much higher value.

Mr. Fetterly said he suspected private equity was looking at the sector more closely because of the recent cyclical downturn and the trust taxation rules. He identified a number of LBO candidates such as Precision Drilling Trust. CCS was not even high on the list. Of course, people didn't think Bell Canada was on many LBO lists either.

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Graph credit: Andrew Barr
National Post / (See hardcopy for Chart/Graph)

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