09/04/2018 - 14:58

Pacific Energy finds smooth M&A path

09/04/2018 - 14:58


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SPECIAL REPORT: Ten years after completing a company-defining acquisition, remote power operator Pacific Energy has struck another similar deal.

Pacific Energy finds smooth M&A path
James Cullen says Pacific’s acquisitions provide upside in terms of better service delivery and sharing of technology. Photo: Attila Csaszar

In 2008, Pacific Energy struck a $77 million deal to buy Kalgoorlie Power Systems, with the Goldfields-based remote energy provider anchoring the listed company ever since.

KPS, which had been operating for 27 years at the time of the tie-up, has continued to expand as part of the listed company.

Its founder, Ken Hall, is still active in the business, as well as being a 50 per cent shareholder in Pacific Energy.

Ten years on, Pacific Energy has struck a similar deal, agreeing to pay $90 million for Contract Power Group, which was established more than 25 years ago by Leon Hodges.

(click here to see a full PDF version of this special report, including summary tables of the quarter's corporate finance deals)

Contract Power has enjoyed rapid growth in recent years and was looking for an equity partner to strengthen its balance sheet.

Mr Hodges hired corporate adviser Tim Day to advise on options, which included potential investments by infrastructure funds and private equity groups.

He opted to become part of Pacific Energy, which will maintain KPS and Contract Power as autonomous competitors.

Pacific managing director James Cullen said the new ownership structure would allow Mr Hodges to get on with what he liked.

“He is motivated by winning work and building power stations and not having to deal with banks,” Mr Cullen said.

“We will take that away from him (dealing with banks).”

Pacific Energy currently has contracted capacity of 308 megawatts.

Most of that is in the KPS business (292MW), which has clients including Sandfire Resources, Regis Resources and Saracen Mineral Holdings.

Contract Power will bring a further 82MW of installed capacity to the group, with 58MW under long-term contracts and the balance on care and maintenance.

Its clients include Pilbara Minerals, Galaxy Resources, Blackham Resources and state government utility Horizon Power.

Pacific will maintain the two brands, and the two businesses will be free to bid against each other.

“However, we will go in at my level and advise the client that Pacific owns both businesses, and if the client wants just one of them to bid, that is fine,” Mr Cullen said.

“The main thing is full disclosure.”

Their main competitors include Zenith Energy, which listed on the ASX in May last year to support its rapid expansion.

Zenith has a contracted capacity of 183MW under its ‘build own operate’ model – about double what it had at the time of listing.

Other competitors include Chinese-owned Energy Developments, which bought enGen in 2011, international group Aggreko, and APA Group, which is focused on remote power stations linked to gas pipelines.


Mr Cullen said Pacific Energy would not try to squeeze big cost savings or other synergies out of its new acquisition.

“We are both very lean businesses already, there is just not that opportunity,” he said.

“It’s a bolt-on acquisition, but very seamless; in terms of integration, it should be very simple.”

Mr Cullen said there was more upside in terms of better service delivery and sharing of technology and innovations.

Mr Hodges has committed to stay in the business for at least two years and Mr Cullen hopes he will stay for longer, just as Mr Hall has remained active, primarily as a mentor and on R&D projects.

Pacific finalised the Contract Power acquisition in a short space of time after the two parties started talking.

“It was a very friendly transaction,” Mr Cullen said.

“The deal structure was agreed quite quickly, and it was simple.

“We think it was fair for all parties.”

Pacific valued the deal in two ways – Contract Power’s earnings and the value of its assets, including dormant assets.

“Because we’re in the industry, we see value in the assets,” Mr Cullen said.

“Even if they’re not generating any revenue today, if we win a job tomorrow and a dormant power station is available, we can pull it down and relocate it.”

He said Pacific Energy was paying six times Contract Power’s expected underlying earnings, averaged across 2019 and 2020.

“The beauty of these businesses, they have long-term contracts, so we have a lot of visibility on their future earnings,” Mr Cullen said.

“The multiples we used are only marginally below what we’re trading at.

“Therefore we don’t expect a quick rerate but see long-term value.”

He said Pacific Energy was continuing to seek growth opportunities, not just in the mining sector in WA, with its targets including grid-connected power generation, along with hydro and bio assets, and opportunities in Africa.

“We’re tendering and chasing a lot of opportunities,” Mr Cullen said.

He noted that Pacific Energy had been short-listed to bid on some AGL assets on the east coast, but backed out after the Contract Power opportunity came along.

“We have always held Contract Power in highest regard out of all our competitors, and if there was only ever one acquisition to do in the sector, this would be the one,” Mr Cullen said.

“This was so important to us, we wanted to ensure we got it right.”


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