© 2015 The Texas Lawbook.
By Mark Curriden
(April 4) – Mergers, acquisitions and joint ventures involving exploration and production companies in the previously red hot Texas oil patch took a nosedive during the first three months of 2015.
While some parts of the energy industry cooled, new data shows that M&A activity in several other business sectors, including healthcare, technology, business services and retail, continued at near record highs for the first three months of the year.
During the first quarter of 2015, 132 Texas-based companies bought or sold assets or merged with other businesses – a 20 percent decline from the 165 business transactions from the same time period last year, according to Mergermarket, an independent global M&A research firm that produced the data exclusively for The Texas Lawbook and The Dallas Morning News.
“M&A, except for oil and gas upstream, remains very strong across nearly all business sectors,” said Rick Lacher, who is managing director of the Dallas office of investment bank Houlihan Lokey.
“2014 was a record year for M&A and I don’t see any slowing down for the rest of 2015,” Lacher said.
Unlike their E&P corporate cousins, oil and gas pipeline companies were clearly unaffected by the decline in oil prices and continued their frantic pace of acquiring and divesting assets.
In January, Dallas-based Energy Transfer Partners purchased Regency Energy Partners, another Dallas company, for $18 billion, which was by far the largest deal so far this year, according to Mergermarket. In fact, nine of the 12 largest transactions in Texas so far this year involve midstream pipeline companies.
“While the E&P and the oil and gas service companies have been whacked hard, the midstream companies are still ratcheting it up and experiencing incredible growth,” said David Buck, a partner at Andrews Kurth who specializes in energy M&A in Texas.
Mergermarket M&A analyst and author Chad Watt said investment bankers and corporate lawyers are busy this year handling a lot of smaller deals – not the mega-transactions of 2014 such as Dallas-based AT&T’s $48.5 billion acquisition of DirecTV or Houston-based Halliburton’s purchase of Baker Hughes for $38 billion.
For example, more than a dozen North Texas car dealerships were sold in January and March, including several to Berkshire Hathaway’s auto subsidiary. In the healthcare industry, nearly a dozen nursing homes, special care units and ambulatory centers changed ownership. Dallas-based Tenet Healthcare Corp. and Baylor Scott & White Healthcare were buyers in several of those transactions.
“It’s been deal after deal after deal,” said Cantey, who represented the owners of Frank Kent Honda of Fort Worth in its sale to Berkshire Hathaway in March. “We don’t foresee any decline in M&A activity for the rest of this year.”
Holt Foster, a corporate law partner at Thompson & Knight in Dallas, said M&A is fueled by a growing economy, increased employment, low interest rates and access to capital.
Last year shattered all records for M&A in Texas, according to Mergermarket. In all, 536 Texas-based companies were involved in deals valued at more than $275 billion.
“While several business sectors have flourished, this is Texas, where oil and gas are still king, especially when it comes to mergers and acquisitions,” Watt said.
The 20 percent decline in M&A in Texas during the first three months of 2015 can be directly traced to the plunge in oil prices, which caused a destabilization in the valuation of assets in the ground owned by exploration and production companies, Watt said.
“There’s a wide valuation disconnect between the sellers and the buyers,” says Baker Botts M&A partner Kelly Rose, who is representing oilfield services company Halliburton in its purchase of Baker Hughes.
Mergermarket reports the number of oil and gas deals declined from 54 during the first quarter of 2014 to 24 such transactions this year – a 55 percent drop.
Rose and others say that the few E&P deals being announced involved oil companies that are in severe financial distress and cannot find another other option for raising capital.
“Larger companies with stronger balance sheets will start taking advantage of the weaker, mid-sized oil companies that are vulnerable and more desperate,” Buck said.
“We are seeing a lot of interest from potential buyers, but there’s no actual activity,” Buck said. “These investors want to cherry pick on distressed opportunities. Not many of those have surfaced yet, but they definitely will later this year.”
Christopher May, a partner in the M&A group at Simpson Thacher & Bartlett in Houston, said investor interest definitely has not waned.
“While fewer deals are getting done, potential investors are laying a lot of groundwork and having discussions for future deals so that they are in a position to act more quickly later this year when expectations of buyers and sellers are likely to be more aligned.”
May, Buck and others predict M&A activity among upstream oil and gas companies will remain slow until at least fall, when companies must perform a redetermination of the value of their assets in the ground. At that point, those companies that are over-leveraged will be forced to sell assets, declare bankruptcy or accept money from a private equity firm as part of a joint venture.
“The private equity firms have a ton of dry powder waiting to jump into the M&A market for some of those distressed assets,” Foster said. “The major private equity firms based in Dallas have raised $10 billion to $15 billion just in the past few months. Even the smaller private equity shops have raised about $500 million.”
Click on the chart below for the full list:
For example, Irving-based Natural Gas Partners has about $16 billion in assets under management. EnCap Investments, which has offices in Dallas and Houston, has raised $21 billion for institutional investments.
In July, New York-based Riverstone Holdings, which has about $27 billion in energy investments, joined with another huge private equity firm, KKR, to create a new multibillion-dollar fund called Trinity River Energy, which is based in Fort Worth and seeks to identify strategic oil and gas investment opportunities in the Barnett Shale and Permian Basin.
M&A experts say that the private equity firms are not alone in their accumulation of cash in search for investments. They point out that super-majors, such as Exxon Mobil and Chevron, have billions of dollars socked away and could use the money to make “needle moving” acquisitions. Oil companies such as Anadarko Petroleum, Apache Corporation and Pioneer Natural Resources are mentioned most often as possible targets.
“Clearly, the major oil and gas companies have a lot of cash to make an acquisition, but they don’t seem too anxious at this point to make such a move.” said David Poole, the general counsel at Fort Worth-based Range Resources.
“I don’t see a lot of strategic buyers doing oil and gas deals right now – only those companies that are doing it for financial reasons,” Poole said.
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