With the rapid manufacturing growth in China and other developing regions, the mining companies are struggling just to keep pace providing raw materials. In turn, exploration budgets have increased and miners have begun scouring new areas in search of natural resources, and this dash consequently has spurred the drilling services sector into action. Advent International is betting, through the acquisition of Boart Longyear, that the need for drilling services is only going to increase in the years ahead.
The transaction will be the first deal out of Advent’s new $3.3 billion fund, Advent International GPE V, LP. Anglo American plc (Nasdaq: AAUK) is the selling party in the transaction, and the deal is valued at $545 million.
Boart Longyear was launched by Anglo American in the 1930s. The subsidiary was formed to take advantage of Anglo American’s stockpile of low-grade natural diamonds (boart), and use the material in drilling products (as the tips of the drill bits). The company today has grown into one of the two global drilling services companies, with its primary business split between the sale of drilling products and tools and providing drilling services.
Boart Longyear’s product line ranges from hard metal tools, soft rock equipment, pneumatic and hydraulic drill rigs and conventional and wire line coring systems. In terms of services the company provides, Dave McKenna, a partner at Advent, said, “The company is actually the leading driller of holes for gold and other natural resources, such as nickel and copper.” Boart Longyear, in 2004, reported EBIT of $67 million.
Advent was attracted to Boart Longyear’s global presence, and McKenna said that as one of the few global businesses in the space, the company can leverage its mining relationships to other parts of the world. “Boart Longyear can move with the mining companies in new, highly prospective areas,” McKenna said, identifying Brazil, Russia and the Congo as just a few of the regions the company has penetrated.
Additionally, the safety record of Boart Longyear appealed to Advent as well, and, according to McKenna, allows it to charge a premium over many of its regional competitors. The third draw listed was the synergistic relationship between Boart Longyear’s manufacturing arm and its services arm, giving the company’s engineers an inside track into new trends in drilling. “It gives the company a unique product development capability. Ideas come from people that actually use the products,” McKenna said.
Meanwhile, regarding the industry dynamics, McKenna estimated that drilling services generally represent around 70% of mining companies’ exploration budgets, and those budgets, thanks to increased demand from China, India and other developing regions, are growing rapidly.
“The demand for nickel and copper has been rising, and the mining companies have to meet that demand… There is a concrete demand and it should be there for the next 10 to 12 years, as those regions continue to increase consumption,” McKenna said.
He further compared the demand today to the period immediately following World War II, when the consumption in Europe and Japan skyrocketed as those regions went on a rebuilding effort.
On top of the industry fundamentals, Advent anticipates making some add-on acquisitions for the Boart Longyear platform. The company is already active in the natural resources space, but to add diversification, the acquisitions could target opportunities in environmental drilling, drilling services related to municipality water projects or even some niche areas in energy.
The acquisition of Boart Longyear is expected to close in late July. McKenna couldn’t comment on the financing other than to say UBS Bank would arrange a senior debt facility, but a published report has identified the facility will include a revolver valued at $75 million, a $300 million term loan and a $125 millon second lien facility. UBS also served as Advent’s buyside advisor, while Lazard advised the seller.
Target: Boart Longyear
Sponsor: Advent International
Seller: Anglo American plc
Purchase price: $545M
Advisor: AAUK: Lazard; Advent: UBS
Legal Counsel: Advent: Lovell’s Pepper Hamilton
AccountANT: Advent: PricewaterhouseCoopers