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Compressco Partners Pays $825M for Compressor Systems

Stocks in this article: GSJKTTIEXH

HOUSTON (The Deal) -- Compressco Partners (GSJK), which is publicly traded but majority owned by Tetra Technologies (TTI), announced Sunday, July 20, that it agreed to acquire Compressor Systems from family-owned Warren Equipment for $825 million in cash, making it the fourth largest compression services provider after Exterran Holdings (EXH).

Oklahoma City-based Compressco said it expects the acquisition to boost its horsepower offerings to 1.045 million from 187,000 and allow it to offer an expanded range of compression services to customers and participate in the market more broadly.

On a conference call with analysts and investors Monday, Compressco management said they had been looking for an acquisition for a while when Compressor Systems came on the market and that the deal works out to 9 times Ebitda and doesn't come with any debt. They said the majority of the target's sales are from rentals, which will have to become master limited partnership compliant but are steady and from a young fleet.

Analysts at Simmons & Co. International said the deal aligns with Compressco management's strategy to expand its cash flow to boost cash distributions to Tetra via its 100% ownership in the general partner.

Founded in 1971, the Midland, Texas-based target, known as CSI, is the largest privately held, full service natural gas compression provider in the U.S. with Ebitda of $82.3 million on sales of $311 million for the 12 months ended March 31.

It makes, sells and maintains natural gas compressors and provides compression services that cover the natural gas production and transportation cycle to a broad customer base. It also owns one of the largest fleets of natural gas compression equipment in the U.S. with 275 units in the 1,000 horsepower and larger range and fabricates and sells engine-driven oilfield fluid pump systems primarily for the international market.

CSI's operations are mostly in south Texas, West Texas' Permian Basin, the Mid-continent and the Rockies, although management said on the call it doesn't have a major footprint in Appalachia, which could be an opportunity for the company.

Compressco said it's obtained committed financing to complete the transaction, which is expected to close in a few weeks. It expects the financing to include issuing $400 million of public equity and $350 million of publicly-rated senior notes with the balance from a $400 million revolving credit facility.

Tetra Technologies, of The Woodlands, Texas, expects to purchase common units in the equity offering and make contributions to maintain its 2% general partner interest up to $40 million. Tetra's 82% stake in Compressco Partners is expected to be cut to 46%.

Compressco Partners president Ronald Foster said in a statement the deal will create a complementary portfolio of compressor units and services to address a range of applications targeting the oil, liquids and natural gas markets in U.S. and international areas. "Our stated strategy of 'scale through growth' by pursuing parallel paths of organic growth and M&A opportunities is greatly advanced by this transformative transaction," he said.

Compressco will now be able to offer production enhancement at the wellhead, vapor recovery at production facilities, gas-lift artificial lift in completion and production and infrastructure compression for midstream and downstream customers.

Compressco expects $5 million and $10 million in annual synergies beginning in 2015 from critical mass and cash flow stability, complementary fleet and services including common infrastructure, increased market exposure through broad product offerings in shale basins, leveraged opportunities for geographic expansion in the U.S. and internationally and manufacturing, engineering and technology opportunities.

The target's management is staying on, with Compressor Systems president Tim Knox leading the combination as senior vice president and chief marketing officer and James Rounsavall becoming CFO.

As a result of the deal, Compressco management expects to be able to recommend to its board a 12% to 14% increase in the cash distribution per outstanding unit for the fourth quarter.

To meet the demand for compression services, Compressco expects to expand capital expenditures to between $90 million and $100 million in 2015, which could boost sales and distributions further. It expects to keep a coverage ratio of 1.2 times distributable cash flow to distributions.

Andrews Kurth LLP counseled Compressco led by David Buck, Bill McDonald and Morgan Kenner and including Robert McNamara, Angela Richards, Lisa Shelton, Lee McMurtry, Matt Grunert, Eric Markus, Henry Havre, Jerry Chandapillai, Jennie Howard and Patrick Dies. Strasburger & Price LLP's Garney Griggs, Whitney Cox and Steve Rubin counseled CSI.

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