Large-Market Deal of the Year: Dresser Inc by Odyssey Investment Partners and First Reserve Corp –

Nearly two years ago, Greenwich, Conn.-based First Reserve Corp. set its eye on what it viewed as a prize in the energy infrastructure industry Dresser Equipment Group, a designer, manufacturer and marketer of highly engineered equipment for the energy sector. In 2001, First Reserve and its partner, Odyssey Investment Partners, took home that prize renamed Dresser Inc.

First Reserve, led by Chairman and Chief Executive William Macaulay, took notice when Halliburton Co., Dresser’s then-owner, announced it was moving its flow control, measurement systems, and power systems business units into a new entity. Patrick Murray, the newly named president, CEO and director of the entity, made it a must-have for energy specialist First Reserve. “Pat Murray is somebody we knew for 15 years and wanted to back,” says Macaulay.

Macaulay and his team wasted no time preparing an offer for Dresser and approached Halliburton, hoping to make a deal before an auction ensued. However, Halliburton, after considering First Reserve’s offer, indicated it wanted to follow through with the auction. After the first round of bidding, First Reserve approached Halliburton again with a pre-emptive offer, which the company considered and again declined.

Realizing his firm needed more firepower to compete for this deal, Macaulay turned to a friend of 25 years, Stephen Berger, president of Odyssey Investment Partners. “We are energy specialists and we normally don’t do highly leveraged buyouts,” Macaulay said at the time of the deal agreement. “So we decided for [the Dresser deal] that we could use somebody who did, and hence, we asked Odyssey to join us.”

The two firms headed into the second round of auction bidding determined to take home Dresser. In February 2001, in one of the largest energy buyouts ever, First Reserve and Odyssey agreed to purchase Dresser for $1.55 billion.

Besides the noteworthiness of the deal’s size, the real breaking news was that the buyers were able to secure high-yield debt for the purchase at a time when many buyout players had already given up on junk bonds.

Macaulay and Paul Barnett, who led the team for Odyssey, both insist, however, that successfully securing high yield for the deal primarily reflected on the company and its management. “The high-yield piece was the icing on the cake here,” says Barnett. “We have a great management team, and they sold the story wonderfully to the capital markets. The company had the size and the recognition of brand name to get it done at the time.”

Macaulay adds that the debt package, offered by Morgan Stanley and Credit Suisse First Boston, did not come without some hard work on the side of the buyers. “The financing went remarkably smoothly, but I think part of it was that we had followed the deal for two years,” he says. “We knew the management; we had done a lot of work; we had our information well organized. So in the final analysis, it paid off in the execution of the deal.”

The deal closed right on schedule on April 10, 2001. The final deal consisted of $400 million in equity, with approximately $21 million coming from Halliburton. There was a 10-year high-yield piece for $300 million that sold for 9.75% at par. The spread on the bonds was approximately 440 basis points. Additionally, there was an $820 million bank facility led by Morgan Stanley and CSFB, which included a $100 million revolver, undrawn at closing, a $265 million term loan A and a $455 million term loan B.

Staying Ahead

Several factors kept the First Reserve/Odyssey team at the front of the pack throughout the auction process. First, being bullish on energy infrastructure, the joint venture was certain it wanted Dresser as a whole, while several competing strategic buyers were interested in divvying up the company. However, there were still three other financial buyers interested in taking Dresser as a whole.

Also, Macaulay is convinced that the joint venture’s exclusive access to the management team and Halliburton directly, namely through Murray, was its main advantage. “We gradually got to know where the hot buttons were with them things like tax, pension, some of the accounting and employee medical benefits and how some of those things could be more meaningful to Halliburton than an extra $25 million or $50 million here or there,” he says.

In fact, the group’s first offer for Dresser, its pre-emptive bid and the price they got it for did not differ that much. “All the numbers were within $25 million of each other.” Macaulay says, “I’m not even saying whether they were higher or lower.”

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