Deal Mechanic: Gulf Capital/ Gulf Marine Services

When Gulf Capital acquired an 80 percent stake in Gulf Marine Services (GMS) in 2007 for approximately $62 million, it was one of the first control buyouts in the oil and gas industry in the Gulf region. GMS is an operator of so-called ‘self-propelled self-elevated support vessels’, providing maintenance for the oil and gas sector. The company’s founders were looking to retire and Gulf Capital acquired the business in a proprietary deal.

Gulf Capital felt GMS operated in an attractive area, given the rapid growth of the oil and gas sector in the Middle East. Particularly after the BP oil spill in 2010, oil companies were taking maintenance and safety very seriously. It is an area where they typically don’t defer spending, says Karim El Solh, co-founder and chief executive officer at Gulf Capital. “As it is a vital service for the oil and gas industry, it is a nice defensive subsector to be invested in.”

In addition, with oil production wells being depleted and production dropping, Gulf detected a clear trend of oil companies moving from onshore to offshore to maintain or increase production levels. So it decided to bet on the growth of offshore oil production in the Middle East.

It was a bet that certainly paid off. Gulf Capital took a small Abu Dhabi-based company and created a business that is now the leader in its field in the Middle East and one of the most significant players globally. Under its ownership from 2007 to date (it still owns 49.7 percent of the business), GMS has seen net profits grow at an annual compound rate of 51.7 percent – equating to an 11-fold increase overall. And this was achieved solely through organic growth, without a single add-on acquisition.

In March, Gulf Capital successfully listed GMS on the London Stock Exchange. The offering, which will see GMS join the FTSE 250 index, netted Gulf a 10x return – returning its entire second fund in the process. So what was the successful formula?

1. New team, new concept 

The first thing Gulf Capital did after acquiring an 80 percent stake from the retiring founders (an unusually large stake in emerging markets) was to use its network of contacts to put together a new international management team. It also invited the team to co-invest into GMS to ensure alignment of interests, says El Solh.

Gulf Capital then expanded GMS’s offering. Maintenance work in the oil and gas sector is usually carried out by normal offshore supply vessels. However, during extreme weather, they are not ideal to use for maintenance work on existing oil platforms, because the risk of accidents is too high as risk. To counteract this, GMS barges arrive next to a platform and then ‘jack up’ on the sea bed, lifting them above the waves. This effectively means that they become permanent structures, and allows GMS to operate in all weather conditions.

“In this specific space, the competition is small because we introduced a new design that had not been used in the region,” says El Solh. However, this novelty factor did result in some initial scepticism, he admits. “So we had to so some tests and prove our concept with the oil companies before they started adopting [it].”

GMS has since managed to expand its client base: it now includes national oil companies, international oil and gas businesses, and broader oilfield services companies.

2. Getting the right refinancing 

In order to build a bigger fleet – which it needed to expand the business internationally – GMS required more than $500 million of financing. But the timing wasn’t ideal.

“It was difficult during the global economic crisis to get all the adequate expansion financing,” El Solh admits. But due to Gulf Capital’s relationships with several local banks, it managed to secure the loans that enabled the business to keep on growing. “This allowed us to double the size of the fleet – and as a result, the company is reporting a much higher EBITDA.” Profits increased from $11 million in 2007 to $125 million in 2013.

In addition, Gulf Capital expanded GMS into Qatar, Saudi Arabia and North Africa, making it the number one operator of jack-up barges in the Middle East. Subsequently, it expanded into the UK and the southern North Sea, picking up clients in both the oil and gas and wind farm sectors.

Asia is the next big target: GMS recently set up a legal entity in Singapore to act as a hub to expand into South East Asia, potentially enabling GMS to enter the waters of Singapore, Malaysia, Indonesia and China.

Last year, Gulf also managed to close another facility worth $350 million. This fresh capital allowed it to refinance existing debt, pay out a dividend recap, and also build some additional (larger) jack-up barges.

3. Picking the right exit 

As you’d expect of a company that increased profits by 1,117 percent over a seven-year period, GMS began to attract plenty of attention from trade buyers. However, Gulf Capital decided to list the business on the London Stock Exchange instead.

“We looked initially at a number of global stock markets,” says El Solh. “The reason we liked the UK is because 40 percent of the company’s revenues are from the UK. GMS operates in the North Sea and has offices in Aberdeen, so there was a lot of connectivity with the UK.”

The oversubscribed GMS offering priced on March 14 at 135p, valuing the business at £472 million ($783 million; €574 million). Gulf Capital’s shareholding reduced from 80 percent to 49.7 percent; it expects to sell down the rest of its stake in the coming year following the end of its lock-up period. The shares also performed well subsequently, shooting up a further 20 percent in their first week of trading.

Gulf Capital said at the time that its total gain from the deal – including IPO proceeds, the dividend recap, and the unrealised value of its remaining stake at the time of the flotation – was more than $600 million, almost 10 times the $62 million the firm originally invested in the business in 2007. According to El Solh, that makes it “one of the most profitable private equity transactions in the Middle East”.
Gulf Capital made the investment from its GC Equity Partners II, a $533 million 2007-vintage. So a $600 million return would pay back the entire fund, plus fees and the hurdle rate, from this one deal alone – with seven companies still in the portfolio (and possibly two more to come).

El Solh hopes the investment will attract more institutional investors into the region. “Private equity in the Gulf is still a young and maturing industry. GMS is a good case study of what can be done within an emerging markets context and why global investors should include the Gulf region in their emerging markets private equity asset allocation.”

Gulf’s investment in GMS in 2007
Profit increase during Gulf’s ownership
Gulf’s return on the investment
Revenues coming from the UK