Mermaid Marine doubles fleet with acquisition

Mermaid Marine doubles fleet with acquisition

In January, we wrote about the need for Mermaid Marine (ASX: MRM) to expand internationally due to their limited domestic opportunities. It has since announced a major overseas acquisition. Have the rough seas subsided?

Mermaid Marine has acquired the Singaporean-based Jaya Holdings for A$550 million. Jaya is an international offshore oil and gas marine services provider with a fleet of 27 vessels and two shipyards in Singapore and Indonesia.

This acquisition will dramatically increase the size of Mermaid: total assets will rise from $728 million to $1,347 million, revenue will increase from $481 million to $602 million, and the historical net profit will increase from $52 million to $85 million. The acquisition fills the revenue hole left by slowing domestic opportunities, but it has come at a high price.

MRM has paid a material premium to acquire its competitor – the offer price is 16.7 times net earnings and the enterprise value/EBITDA ratio is nearly 8 times. By comparison, Mermaid, at $2.40 (and down from $2.80 prior to the announcement), appears to be selling on an historical price-to-earnings multiple of 10.7 times, and an enterprise value/EBITDA ratio below 6 times.

Synergies are typically required to warrant such premiums. In this instance, there are minimal crossover benefits, as each company is effectively a stand-alone player in their own regions. What’s more concerning is Jaya’s committed capital expenditure of $146 million in the next 24 months, of which $94 million is currently uncontracted upon completion.

The transaction was funded with a $253 million debt facility and $317m of equity from an under-written 7/18 rights issue and a retail and institutional placement at $2.40 per share. Mermaid’s net indebtedness and shares on issue have increased materially, while the net return on shareholder’s funds is expected to fall below 12 per cent. Integration risk increases with the size of an acquisition, and this casts further doubt on the value MRM management hope to build from the deal.

At this stage, we would prefer to watch the developments from the shoreline.