OIL PRICE VOLATILITY – 2015 RESPONSE SERIES March 2015 Successful M&A in volatile markets M&A remains on the agenda for many companies but the drivers may be different than in recent times. Volatility in the oil price is impacting companies differently depending on where they operate in the supply chain. This creates stress but also opportunities in the marketplace for M&A activity. We will continue to see deals but the transaction dynamics in many situations will be different to what was seen in 2013 and 2014. Drivers for M&A activity Cost pressure in the industry will act as a driver for further industry consolidation as we have already seen with a number of large high profile mergers being pursued or rumoured, both on the Oilfield services and E&P side of the O&G market. Non-core disposals will be on the agenda for some of the larger groups as they look to rationalise their portfolios. Some of the listed players will look to raise capital and undertake corporate actions which are likely to improve share price performance. We will continue to see private company M&A activity although agreeing pricing for these deals will be more challenging in certain situations. “Although many businesses in the sector are well placed to withstand a lower oil price environment and may have the ability to flex cost structure, we expect to see some distressed opportunities come to market. ’’ This may also present buying opportunities for well capitalised corporates and private equity who are prepared to take a longer term view on the sector. Factors to consider in unlocking transactions in this environment include: Case study Project Neptune  Our client was a large privately owned consultancy group focused on the O&G sector who wanted to acquire a financially challenged engineering business operating predominately in the UK and Asia.  The target was distressed and the appointment of an administrator was imminent, who would be required to run a competitive process. Our approach  We provided M&A buy-side advice to help the client successfully acquire the company .  The deal team comprised both M&A and Insolvency specialists who were able to provide insight into how an Administrator was likely to behave and how best to position the clients bid. Results  The client was successful in a competitive situation.  Business disruption was minimised with the overall transaction being completed in less than three weeks.  The business has been a successful acquisition for the client. Drivers for sale – normal sale vs. stressed vs. distressed situations? Financial performance – can an accurate picture of medium term maintainable earnings be established Price expectations – can a price be agreed? Strategic fit, synergies and longer term potential in the market Impact of oil price on the specific industry subsector vertical in which the buyer and seller operate Stressed scenario – who is in control, the creditors or the equity? Geographic market exposure © 2015 KPMG LLP, a UK limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. Printed in the United Kingdom. Non-core disposals Non core disposals can be value accretive for both buyers and sellers In the oil sector at the moment, the capital markets are keen to see public companies take action to address market challenges. Non-core operations may be underperforming or not being appropriately valued by the equity markets. A disposal may present an opportunity to raise cash, improve share price performance and/or access synergy value. A degree of stress emerging in certain verticals of the sector, may well present opportunities for well capitalised and fleet of foot purchasers. Considerations in non-core disposal situations Stand alone plan and financials Customers & suppliers TUPE issues & pensions Deal structure & pricing Tax structuring Management Drivers of non-core disposals Non-core disposals typically involve a division, or part of businesses being sold to other trade buyers or private equity. Drivers for these transactions will vary but will often include one or a combination of the following:  Financial underperformance and/or the need to de-lever to satisfy funders more nervous about the sector  The need to reduce pressures on management time by simplifying the business  The ability to cut costs by simplifying the supply chain through acquisitions of suppliers and customers  The requirement to address over capacity in particular sub sectors of the supply chain  A method by which to access synergies or efficiency savings – the Wood Report’s collaboration agenda may well result in corporate mergers  Simplification of ownership and operating structures for infrastructure and oilfields  New buyers entering the sector, focusing on the ability to acquire more challenged assets at a low point in the cycle and then realise value as the cycle turns By its nature, a non – core disposal is often more complex than the sale of a fully standalone business. This complexity may mean additional costs and/or transaction risks which need to be appropriately managed. Transitional service agreements IT & other operational infrastructure Market impact & City Code Case study Project Tobasco  Our client was a large listed group who wanted to dispose of a non–core subsidiary focused on testing of industrial materials and engineered components within the Oil & Gas sector. Our approach  We provided M&A sell-side advice to help the client successfully sell a non-core subsidiary to a strategic trade acquirer.  Assisting management in their preparation of a comprehensive stand alone financial and operational business plan which allowed bidders to focus on the upside potential and synergies available. Results “At KPMG we have the experience to understand both the vendor and buyer perspectives and how this may influence their respective opinions on value for a transaction’’ Contact for Oil & Gas M&A Dane Houlahan Partner T: +44 (0) 1224 416 985 E: [email protected]  We successfully delivered a transaction that exceeded the clients value expectations.  Business disruption was minimised with the overall transaction being completed ahead of client schedule and within 6 months of appointment. © 2015 KPMG LLP, a UK limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. The KPMG name, logo and "cutting through complexity" are registered trademarks or trademarks of KPMG International. The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavour to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation. Produced by Create Graphics | CRT035462 | March 2015 www.kpmg.co.uk