Large Market Deal of the Year: Vetco –

Perhaps no other private equity transaction completed in 2004 was as good a case study of persistence, devotion and resolve, than the globally-reaching $925 million acquisition of four divisions – known today as Vetco International Ltd – from Swiss-based international engineering conglomerate ABB Ltd. For two years, an intercontinental buying consortium made up of Candover Investments PLC, JPMorgan Capital Partners and 3i Group PLC had no rest through tireless negotiations and an ever-unfolding diligence process that ultimately involved the Securities and Exchange Commission (SEC), U.S. Department of Justice (DOJ) and a guilty plea on behalf of the seller.

It all started in mid-2002 when London-based Candover – using its experience in the energy sector as leverage – gained entry to a strategics-only auction for ABB’s Drilling & Production; Subsea; Maintenance Modification and Operations; and Process & Facilities subsidiaries, all of which provide branded products and services to independent, national and international oil companies in more than 30 countries. “Just being admitted [into the Citigroup-run auction] was a task in and of itself. But once we were there, we really had to fight to show that we could out-maneuver the trade bidders,” said Candover Director John Arney.

To help win that fight and add weight to its bid, Candover invited 3i and JPMP-both of which have extensive histories in the energy space-into the deal, Arney said. 3i worked with Candover on the European end of the transaction, while JPMP handled the diligence on ABB’s Houston, Texas-based operations. Having an international consortium was necessary due to ABB’s widely dispersed reporting structure, Arney added.

Three-fold International Funny Business

The mess hit the fan in late 2003 when ABB disclosed to the DOJ and the SEC knowledge of suspicious payments to government officials made by two of the divisions being sold. At the time the allegations came to light, the PE trio was in “pole position” for the assets and had already invested more than a year’s worth of diligence and term negotiations into the deal, Arney said.

Investigators – including a team of forensic accountants led by JPMP – looked into claims that Houston-based ABB Vetco Gray U.S. and Aberdeen, Scotland-based ABB Vetco Gray U.K. had made illegal payments to officials in Nigeria, Angola, and Kazakhstan to secure contracts and proprietary information-a violation of the anti-bribery provisions of the Foreign Corrupt Practices Act of 1997. According to the DOJ and the SEC, more than $1.1 million was doled out to officials of the three countries between 1998 and 2003.

“During the period in which the payments were made, ABB obtained or retained business in Nigeria, Angola and Kazakhstan that generated profits totaling at least $5.5 million,” according to a complaint made by the SEC.

The investigation into the bribery charges extending the already-lengthy process for another 10 months and had some of the deal team wondering if the deal would ever close. “There is always doubt when you’re involved in a regulatory environment where, at the end of which, somebody could plead guilty to a charge,” said Arnie Chavkin, JPMP’s chief investment officer.

Concurrent to JPMP’s cooperative inquiry into the corruption charges with the two regulatory bodies, Candover and 3i led an exhaustive seven months of legal negotiations with ABB and consultations with the deal’s financing syndicate of JPMP, Bank of Scotland and Credit Suisse First Boston. The terms of the transaction changed on an almost weekly basis as more and more information surfaced from the U.S. investigations and was communicated across the Atlantic, Arney said.

On July 6, 2004, ABB pled guilty to the charges leveled against it and was ordered by regulators to pay, through its accused subsidiaries, $10.5 million in criminal fines and $5.9 million in disgorgement of illegally-earned profits and their accrued interest.

The deal closed six days later.

According to a source close to the transaction, the deal’s $925 million price tag (6.7x pro forma 2003 EBITDA of $137.2 million) was a 10% discount off ABB’s original asking price of more than $1 billion.

Even in its simplest form, it would have been a complicated transaction to close, Chavkin said. Just the time and energy involved in unraveling three separate accounting practices and business approaches from a corporate parent and re-fitting them into a single, stand-alone company, was enough to fill the consortium’s plate, he said. Add to that the task of having to understand every one of the scores of countries that the subsidiaries operate in, and the specifics of what they do there, and that plate gets chock-full.

“You may ask, why, after all that, did we decide to go through with the deal? And the answer would be the same as when we decided to enter the process in the first place,” JPMP’s Chavkin said. “Because we thought the prospects were great, we thought it was well positioned within the industry, we liked the brand name and the products, and we saw a great outlook for the company.”