Obviously the board of Brisbane-based ALS (formerly known as Campbell Brothers) isn’t too worried about the slump in activity in the mining and resources sector (its key area of interest) lasting too long, judging by the announcement of two purchases in the sector yesterday – including its biggest deal yet – the more than half a billion dollar purchase of a big UK-owned oil and gas services group called Reservoir Group.
In addition it is buying the small Australian based Earth Data, a provider of niche sampling and analysis services to Australia’s oil, gas and coal industries.
If the board and management had been concerned about the duration of the slowdown, and its impact on ALS’s finances and future revenue streams, you would have thought it would have been imprudent to commit so much money to deepening the company’s involvement in the area.
It is a considerable investment – but clearly the board doesn’t think it’s a gamble, or a waste of money. It’s about adding more capacity in oil and gas to the company’s existing minerals, water and pollution testing facilities.
CEO Greg Kilmister confirmed that yesterday when he said the acquisitions were part of the company’s efforts to increase its exposure to the high-growth oil and gas sectors.
"The acquisition will considerably broaden our capabilities in upstream oil and gas and will strongly complement our existing laboratory services," he said in a statement.
He said ALS’s focus on laboratory services would complement Reservoir’s existing portfolio of technical services.
ALS plans to build at least three oil and gas hub laboratories to service the global market.
And there’s also a bit of the ‘straw hats in winter’ thinking of buying assets and expanding when the industry is in a downturn.
Although oil and gas is said to be doing well compared with mining, people should remember that WorleyParsons, one of the biggest oil and gas services providers around the globe, issued a profit downgrade two months ago because of reduced spending and project delays.
If anything the weakness in global demand for oil and gas and the downturn in mining seem to be hitting at roughly the same time, producing revenue and earnings pressures for most services providers.
ALS itself is not exempt, with a warning earlier this year, and yesterday a downgrade for the current half year period.
ALS revealed it had been hit hard by the slowdown in resource-sector spending, and expects a 26% slide in earnings for the six months to September, which would take net profit to a range of $95-to $105 million.
ALQ YTD – Down with the sector but spending almost $A600m expanding business
This is after including an initial contribution of an estimated $4-$5 million from the two acquisitions outlined yesterday.
ALS said markets for its geochemical and coal services activities are "challenging".
The strength of ALS’s message about the Reservoir and Earth Niche deals being ‘opportunistic’ and timed to take advantage of lower asset values, will be vital as it and its advisers sell a 1 for 11 rights issue in the next few days. That’s aimed at erasing $A274 million of the purchase cost of $A579 million.
The shares will be issued at $7.80 a share, a steep discount to the $9.41 last sale on Monday.
The remainder of the purchase will be funded through a new $A304.49 million debt facility, a share issue to Reservoir senior management and ALS’s cash reserves.
Reservoir has annual revenues of $US223 million, with earnings before interest, tax, depreciation and amortisation of $55 million, which prices the purchase at a multiple of just over 10 times pre-tax profit.
Along with the purchase of Reservoir, ALS is to pay $18 million for a local group Earth Data, which also services the oil and gas sector, but concentrates in Australia.
ALS shares will be in a trading halt until Friday to allow most of the issue to be completed.