Income trust seeks value by going private

Talk of private equity making inroads into Canada’s weakened energy trust sector has moved from speculation to action, with a heavyweight investor group backing a C$3.5 billion deal to shift oilfield services giant CCS Income Trust from the public realm.

If CCS unit holders tender to the offer of C$46 a unit — up 21.4 percent from the closing price prior to the bid being announced — ownership will be handed to CCS founder and Chief Executive Officer David Werklund and a consortium of six other investors, led by Goldman Sachs Capital Partners, Kelso & Co. and Vestar Capital Partners, each holding 16 percent.

Werklund will be the largest single shareholder at 26 percent and retain his executive positions in a firm that has almost 3,000 employees and provides a diverse range of services across four divisions. He said the transaction “provides value and liquidity for unit holders.”

Werklund will profit handsomely if the deal goes through, reinvesting about 60 percent of his holdings or close to C$500 million, but cashing in the balance of about C$330 million. He said the Canadian government’s decision to make trusts pay corporate taxes was a factor in the move “but our responsibility to recognize the value of this opportunity was really the driver.” The deal came just one week after that move became law.

CCS financial advisor Naveen Dargan said taking CCS private creates additional taxable deductions for unit holders, creating an improved return on capital.

Many trusts have seen their market value slashed since the tax decision was announced last October, with energy service trusts absorbing some of the heaviest punishment as a result of the drop in natural gas prices and drilling slump, making them ripe for the plucking by private groups.

Sector leaders such as Precision Drilling Trust and Savanna Energy Services have experienced a major erosion of their stock prices, but CCS has survived the storm largely because of its focus on environment services such as waste management rather than drilling, Werklund said.

Against a backdrop of predictions from analysts that CCS will create substantially more value over the next two years, Werklund agreed that the United States offers “great opportunities,” although CCS will tread cautiously because it does not know the country as well as Canada. He also said there is still ample room for growth in the aging Western Canada Sedimentary basin.

However, it is by no means certain that existing investors will accept the takeover bid. Aleem Israel, with Cormark Securities, said unit holders could demand a higher value because of CCS’s consistently high returns on capital. Despite Werklund’s cautionary observations, Israel thinks CCS is on the verge of a “massive growth opportunity” in the United States.

—Gary Park