- Enerflex Ltd. (TSX: EFX) and Exterran Corporation (NYSE: EXTN) announced a business combination to create a premier integrated global provider of energy infrastructure. These are the details.
Enerflex Ltd. (TSX: EFX) and Exterran Corporation (NYSE: EXTN) announced a business combination to create a premier integrated global provider of energy infrastructure. The company is going to operate as Enerflex Ltd. and will remain headquartered in Calgary, Alberta, Canada.
Through greater scale and efficiencies, the deal will strengthen Enerflex’s ability to serve customers in key natural gas, water, and energy transition markets, while enhancing shareholder value through sustainable improvements in profitability and cash flow generation.
The companies are going to combine in an all-share transaction pursuant to which Enerflex will acquire all of the outstanding common stock of Exterran on the basis of 1.021 Enerflex common shares for each outstanding share of common stock of Exterran, resulting in approximately 124 million Enerflex common shares outstanding upon closing, representing an implied combined enterprise value of approximately US$1.5 billion. The deal value for Exterran is approximately US$735 million, which represents an 18% premium to Exterran’s enterprise value as of January 21, 2022.
The deal value paid for Exterran implies an EV/2022E Adjusted EBITDA of 3.6x and Price/2022E Cash Flow of 1.9x, including synergies, respectively. And upon closing of the deal, Enerflex and Exterran shareholders will respectively own approximately 72.5% and 27.5% of the total Enerflex common shares outstanding. Enerflex is going to continue to trade on the Toronto Stock Exchange (TSX) and intends to apply to either the New York Stock Exchange (NYSE) or the NASDAQ exchange (NASDAQ) for the listing of Enerflex common shares to be effective upon the deal closing.
Strategic Rationale
Creates a Premier Integrated Global Provider of Energy Infrastructure:
— Highly complementary product lines, geographies, and asset bases provide enhanced scale, efficiencies, and expanded offerings for customers.
— The pro forma geographic exposure will be well-balanced with approximately 25-35% of revenues from each of North America, the Middle East, and Latin America.
— Accelerates Growth of Gross Margin from Recurring Segments:
— Combination significantly accelerates the generation of predictable, recurring gross margin from energy infrastructure and after-market services platforms.
— Over 70% of the combined entity’s gross margin will derive from recurring sources, strengthening its margin profile and reducing cyclicality.
Improved Operational Efficiencies:
— Expect to realize at least US$40 million of annual run-rate synergies within 12 to 18 months after closing through overhead savings and operating efficiencies.
Accretive to Shareholders:
— Expected to approximately double Adjusted EBITDA and be over 50% accretive to cash flow per share and approximately 50% accretive to earnings per share (subject to purchase price allocation to be determined upon closing), for Enerflex shareholders.
— Enhanced scale with pro forma 2023E Adjusted EBITDA of US$360 million to 400 million, inclusive of synergies.
— Meaningful excess free cash flow beginning in 2023 that supports debt reduction, shareholder returns, and continued growth.
— After closing, Enerflex expects to maintain its quarterly dividend of CAD$0.025 per common share.
Transaction Benefits From a Long-Term, Stable Capital Structure:
— The combined entity will benefit from a capital structure that provides ample liquidity.
In connection with the deal, Enerflex has entered into a binding agreement with the Royal Bank of Canada to provide Enerflex with fully committed financing consisting of a US$600 million 3-year revolving credit facility and a US$925 million 5-year bridge loan facility. And the bridge loan will provide financing to backstop an anticipated issuance of new debt securities prior to the closing of the deal. The committed financing is sufficient to fully repay existing Enerflex and Exterran notes and revolving credit facilities and support putting in place a new capital structure, provide for capital expenditures and other ordinary course capital needs and provide significant liquidity for the pro forma business.
The new revolving credit facility will be subject to a bank-adjusted total net debt to EBITDA covenant of 4.5x, stepping down to 4.0x by the fourth quarter of 2023. And Enerflex targets a bank-adjusted net debt to EBITDA ratio of 2.5x – 3.0x within 12 to 18 months of closing.
Following capital project commitments in 2022, the combined entity’s capital allocation in 2023 onwards will prioritize: (i) balance sheet strength; (ii) sustainable shareholder returns; and (iii) disciplined growth focused on full-cycle earnings.
Commitment to Sustainability:
— Aligns strong cultures emphasizing the health and safety of our global workforce and corporate citizenship.
— Global coverage enhances the ability to deliver sustainable natural gas, water, and energy transition solutions, including carbon capture utilization and sequestration, biofuels (including renewable natural gas), produced water reuse and recycling, and electrification.
KEY QUOTES:
“This is an exciting day in the history of our companies. The Transaction is immediately accretive to shareholders; enhances our presence, offerings, and scale across our regions; and importantly, executes upon our years-long strategic goal of increasing recurring revenues to improve the profitability and resiliency of our platform. Enerflex and Exterran each have a long history of global expertise in the delivery of modular energy solutions. Together, we are more efficient and better positioned in global capital markets. The Transaction will improve our ability to partner with an expanded set of customers to solve their growing energy infrastructure challenges with integrity, creativity, commitment, and success.”
— Marc Rossiter, Enerflex’s President and Chief Executive Officer
“We are excited about the ability to create shareholder value through this Transaction and improving our product and service offering. The scale and efficiencies this combination brings is the right path for Exterran and brings significant opportunities for accelerated growth in produced water treatment and energy transition products and services.”
— Andrew Way, President and Chief Executive Officer of Exterran
