HOUSTON—Thinking about finding a partner and jumping into the energy M&A market? Just be careful how you do it.
“The M&A market is pretty frothy right now and in the last quarter we’ve seen it pick up appreciably,” said Nemesio “Nemo” Viso, managing director of Bluehenge Capital Partners at the recent Duff & Phelps and Amegy Bank of Texas Private Capital Conference. “The energy service energy is starting to open up again.”
Ryan Franco, managing director of Altos Energy Partners LLC, agreed that now is a good time to bring on a potential partner or partners because valuations across almost all industries in North America are at historic highs, with the possible exception of energy services.
But while it might be a great time to be raising capital, establishing a formal process that includes a skilled outside adviser is critical.
“Another pearl of wisdom would be to seek financial partners that have industry expertise in a specific area, your area of interest,” Franco said. “That’s whether it’s private equity of debt.”
Look at the potential partner’s track record, he advised, especially performance during down cycles. Also be aware of the personal dynamic between you and the capital provider to ensure you have a connection.
“You’re going to be working with them a long time,” he said.
Neil Kallmeyer, managing partner with The CapStreet Group, echoed Franco’s comments but he tossed in a warning: “The process is generally going to take longer and be a lot harder than advisers are telling you.”
So, along with stocking up on patience, Kallmeyer suggested:
Hire an adviser: All four of the panelists during the M&A trends session came back to this advice but Kallmeyer noted that not all advisers are created equal.
“You really have to think about an adviser who has your expertise and has contacts that are right for your company,” he said. “If you’re a smaller company, then you’re not going to hire Goldman Sachs or Morgan Stanley or [conference host] Duff & Phelps. You really have to think about the right adviser for your business.”
Hire a good lawyer. Your college roommate may be a terrific litigator but M&A requires a different skill set. “when you get into M&A deals, you really need an adviser who can help you navigate through purchasing agreements,” he said.
Think about estate planning. If your company is private, you need to figure it out before signing agreements for tax purposes. “Before you start the process, really look at estate planning and what you want to accomplish and what your goals are,” Kallmeyer said.
Make sure your data is ready. “Lenders want to see a lot of data,” Kallmeyer said. That’s how investment committees get comfortable with the idea of engaging in the process.
Panelists found little downside to planning ahead.
“If you have the luxury of time, if you have a year-plus, there are a lot of things you can do internally with your company,” said Jay Turner, partner with Dos Rios Partners. He referred to the “infrastructure” of the company, including a good accountant, a solid management team and customer concentration.
“Those are the kinds of things where you have a longer-term plan in place,” Turner said. Those are things you can do internally to increase the value of the business.”
Joseph Markman can be reached at jmarkman@hartenergy.com and @JHMarkman.
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