American Capital Provides Seller Financing On Oil Deal

American Capital Strategies likes making life a little simpler for the buyer, especially when unloading a company during a credit crunch. The publicly-traded firm helped line up a pre-arranged financing package for parties bidding on Anchor Drilling Fluids USA, and pitched in on the lending side.

Castle Harlan, a New York-based mid-market LBO shop, won the Jefferies Finance-led auction with its $250 million, 6.3x EBITDA bid, which required an $80 equity investment. Thanks to a $110 million Term Loan B and $15 million revolver from Jefferies Finance, and $60 million in mezzanine financing from American Capital, the investment enjoys a 3:1 debt-to-equity ratio. American Capital, which operates up and down the capital structure of deals, also kicked in $9 million in equity.

It’s not clear how many buyout firms could have pulled off a deal like this, reminiscent of the seller-financing packages corporations offer in order to add frenzy to the bidding process for their disposable divisions. The willingness of publicly traded American Capital Strategies (Nasdaq: ACAS) to act as mezzanine provider and to continue to hold an equity stake no doubt gave added comfort both to the buyer and to Jefferies Finance. The downside for American Capital is that it didn’t score a complete exit. But at least it can feel especially knowledgeable about its remaining stake. “There’s less risk we could find something we don’t already know and walk away,” said Managing Director Kevin Kuykendell.

American Capital bought Anchor Drilling in 2005 for $21 million, then attached two bolt-on buys: Ozark Mud & Chemical and Toby’s Vacuum Truck Service. The companies cost an additional $14.3 million, according to American Capital’s latest annual report. Its purchase of Anchor Drilling and its add-ons came from American Capital’s off-balance sheet funds; it made the $60 million mezzanine investment from the its balance sheet.

Anchor Drilling, based in Tulsa, Oklahoma, provides services to onshore oil and gas companies. The business’s equipment is used to lift drill bit cuttings to the surface, clean and cool the drill bits, and manage pressure to prevent a collapse during the drilling of oil and gas. Its customers operate across the Northwest and Southwest. Founders Bob West and Phil West still run the company, and while their stakes are undisclosed, management held 30 percent under American Capital.

The business competes with major players such as Halliburton Company, Baker Hughes Inc., and Smith International. The company is distinguished by its strong relationships with the most active U.S.-based land drillers. Buyer Castle Harlan was particularly attracted to Anchor Drilling’s strong free cash flow, which results in part from the low cost required to maintain and update equipment and facilities, according to William Pruellage, a managing director at Castle Harlan. The company’s plans for growth include further penetrating existing markets and expanding geographically within the United States.

With its Anchor Drilling investment the majority of Castle Harlan’s $1.16 billion fourth fund is deployed. The firm hasn’t started formal fundraising yet but has plans to enter the market in the coming months to raise its anticipated fifth fund, with a target for $2 billion, as first reported in Buyouts in September. Castle Harlan has had success in the energy industry before through its ownership up oil and gas drilling product manufacturer RathGibson, and natural gas compression equipment company Universal Compression.

The deal is slated to close in early April.—E.G.