- The Investment
The Board of Directors of CSE Systems & Engineering Ltd ("CSE" or the "Company") is pleased to announce that the Company has entered into a conditional sale and purchase agreement with each of Walter R. Wooten, John W. White, Kenneth W. Castlebury, T.L. (Rick) Lynn and Kenneth W. Oliver (the "Vendors") under which the Company has agreed to acquire from the Vendors the entire issued and paid-up share capital of W-Industries Inc., (the "W-I") for an aggregate cash consideration of US$21 million or approximately S$35 million (the "Proposed Acquisition"). The transaction is subject to CSE's shareholders' approval.
- The Purchase consideration The purchase consideration of US$21 million or approximately S$35 million (including the assumption of shareholders' loan of approximately US$6 million) was arrived at, following negotiations on a willing-buyer and willing-seller basis, having taken into account the factors described in the following paragraphs:
- Price to 1999 unaudited profit-after-tax about 8.8 times.
- Strategic fit of W-I with CSE is through the enhancement of the Company 's capabilities in expanding geographic coverage, improving market share, broadening technical capabilities and providing cross-selling opportunities. This is in line with CSE'S vision of becoming a global world-class systems integrator servicing the oil & gas industries.
- The good track record and quality customer base of W-I.
- The net tangible asset ("NTA") of W-I as at 31 Dec 1999 was US$5.5million after taking into account shareholders' loan. The price to book is about 3.5 times.
- The expected favorable contribution to the profit after tax of CSE for Year 2000 and beyond.
The Company proposes to finance the Proposed Acquisition through the unutilized portion of IPO proceeds and share placement of 18 million new shares.
The Company has signed a placement agreement on 18 January 2000 with Vickers Ballas & Company Pte Ltd (the "Placement Agent") pursuant to which the Placement Agent has agreed to subscribe, or procure subscriptions, for an aggregate of 18,000,000 ordinary shares of S$0.05 each in the capital of the Company (the "Placement Shares") at S$1.53 per Placement Share (the "Placement Price") for a total consideration of S$27,540,000.00 (the "Private Placement"). The Placement Shares when issued and fully paid will rank pari passu in all respects with the existing ordinary shares of S$0.05 each (the "Shares") in the capital of the Company.
- Rationale for the Investment
The goal of CSE is to become a world-class Industrial System group. This acquisition will help CSE attain that goal. The enlarged entity with greater resources and critical business economies of scale will be in a better position to reach out to global customers requiring total integration services.
The Proposed Acquisition aims to achieve the following benefits:
Enhanced process systems integration capabilities
W-I's current focus is in providing Industrial Automation in the upstream oil and gas production facilities. With CSE's good track record in the downstream process plant Information Technology ("IT") management system and CSE's terminal automation and P-gas products, the enlarged entity will be well positioned to optimize system integration services from upstream (oil and gas production facilities) to downstream (refineries/chemical plants and raw/finished products distribution applications) in North America.
Regional headquarters for Middle East and North and South American markets
W-I will spearhead the Group's future businesses in Middle East and the Americas, leveraging on W-I's presence in America and utilizing the combined expertise of the two Companies.
Enhance cross marketing opportunities
W-I will tap on CSE's other services such as the enterprise business and networking business to seek new business opportunities with its existing customers. CSE will also actively market W-I's highly specialize pneumatic, hydraulic and above sub-sea control systems.
Improve operating margins
The Company believes that its relatively cost-effective engineering centers in India, Thailand and Malaysia will provide significant opportunities for W-I to leverage on these resources and hence increase its profitability.
- Information relating to W-I
W-I, incorporated in Texas in 1984, is an Engineering Systems Integrator which designs, engineers, assembles, programs and installs control and instrumentation systems for specific applications in the upstream offshore oil and gas and process industries. Major revenue is derived from the upstream offshore oil and gas production facilities.
W-I 's control and instrumentation systems are custom designed and include both conventional pneumatic and hydraulic control systems and sophisticated electronic microprocessor-based controls employing programmable controller, Unix and NT workstations and high speed networking infrastructure. Typical applications for W-I control and instrumentation systems include oil and gas production safety systems, fire and gas detection systems, pipeline compressor station data acquisition systems, surface controls for subsea production control system etc.
W-I has over the years established numerous blue chip customers such as Amoco, Arco, BP Exploration, Chevron, Conoco, Dow Chemical, Enron, Exxon, Mobil, Shell and Texaco.
The unaudited financial performance of W-I for the four financial years ended 31 December is set out below:
Profit/Loss
|
US$'000
|
1996
|
1997
|
1998
|
1999
|
3 years CAGR
|
|
Sales
|
16440
|
20384
|
24006
|
23448
|
13%
|
|
Profit after tax
|
1770
|
2264
|
2399
|
2404
|
11%
|
CAGR : Compound Annual Growth Rate
Balance sheet
|
US$'000
|
1996
|
1997
|
1998
|
1999
|
|
Fixed assets
|
1045
|
1052
|
1101
|
1061
|
|
Current assets
|
2215
|
6322
|
5958
|
7186
|
|
Total assets
|
3260
|
7374
|
7059
|
8247
|
|
Current liabilities
|
846
|
2983
|
2153
|
2194
|
|
Non-current liabilities
|
704
|
642
|
579
|
501
|
|
Total liabilities
|
1550
|
3625
|
2732
|
2695
|
|
Share capital
|
20
|
20
|
20
|
20
|
|
Shareholder loan
|
1690
|
3729
|
4308
|
5532
|
|
Shareholders funds
|
1710
|
3749
|
4328
|
5552
|
|
Return on Sales
|
10.8%
|
11.1%
|
10.0%
|
10.3%
|
|
Return on Equity
|
103.5%
|
60.4%
|
55.4%
|
43.3%
|
- Risks factors
The Proposed Acquisition is vulnerable to certain factors, in particular, the following:
Dependency on key management
The success of W-I is dependent to a certain extent on the continuation of the services of the key executives. The key executives have entered into 3-years service contracts with W-I. W-I has implemented a performance incentive plan for the employees to share the performance bonuses. The performance incentive plan is tied to profitability and subject to meeting certain targets.
US currency risk
As the Proposed Acquisition and the W-I financial transaction will be made in US$, there were be exposure to US currency risk. Fluctuations in US$ rates against the S$ are unpredictable and may have a significant impact on the Group's revenues, profitability and share valuation. The Company will actively manage the foreign exchange position using a combination of forwards contracts and bank borrowings.
Dependency on crude oil prices
W-I derives a substantial proportion of its revenue from the upstream oil and gas production facilities. The business is highly cyclical and dependent on the crude oil price, such cyclical elements potentially have a material adverse effect on the Group's operating results and financial conditions.
W-I will continue to adopt a cautious approach and to exercise cost control to move the operating expenses in tandem with the business which achieved some notable success as reflected in its financial performance in 1999 when the crude oil price was at an all time low at fourth quarter 1998 and first quarter 1999. W-I will also diversify its services to include plant IT, terminal automation and P-Gas products. Such diversification will somewhat reduce the business' dependency on the crude oil prices.
- Financial effects
For the purpose of illustration, if the Proposed Acquisition had been completed on 1 January 1999, the financial effects of the Proposed Acquisition on the consolidate Revenue, Profit after tax, Earnings per share, NTA per share, based on unaudited consolidated financial statements of CSE and W-I, both for the six months ended 30 June 1999 would be as follows:
- Proforma profit/(loss) for the 6 months ending 30 June 1999
|
S$'000
|
CSE
|
W-Industries
|
Group
|
Change
|
|
Sales
|
34,902
|
20,281
|
55,183
|
58.1%
|
|
PAT
|
3,846
|
2,174
|
6,020
|
72.7%
|
|
ROS
|
11.0%
|
10.7%
|
10.9%
|
-0.1%
|
- Net tangible assets per share
The effect of the private placement and the acquisition on the net tangible assets ("NTA") of the Group based on the unaudited balance sheet as at 30 June 1999 is shown below:-
|
S$
|
No of shares
|
NTA per share
|
|
Consolidated NTA as at 30 June 1999
|
30,753,768
|
239,141,875
|
0.13
|
|
Net proceeds from Private Placement
|
26,713,800
|
18,000,000
|
|
|
Adjusted NTA after Private Placement
|
57,467,568
|
257,141,875
|
0.22
|
|
Purchase consideration of the acquisition of shares in the capital of W-Industries Inc*
|
(24,900,000)
|
|
|
|
NTA of W-Industries
|
33,200
|
|
|
|
Adjusted NTA after Private Placement and Acquisition
|
32,600,768
|
257,141,875
|
0.13
|
Assume US$/S$ exchange rate of 1.00 : 1.66 and net proceeds per share is S$1.4841
- Earnings per share
The effect of the private placement, assuming the proposed acquisition was completed on 1 January 1999 on the earnings per share ("EPS") of the Group based on the unaudited results of the Group for six months ended 30 June 1999, is shown below:-
|
S$
|
No of shares
|
EPS (cents)
|
|
Consolidated earnings for 6 months ended 30 June 1999
|
3,846,786
|
239,141,875
|
1.6
|
|
Increase in shares from the Private Placement
|
|
18,000,000
|
|
|
Unaudited profit of W-Industries for the 6 months ended 30 June 1999
|
2,173,559
|
|
|
|
6,020,345
|
257,141,875
|
2.3
|
- Financial impact per share
The effect of the private placement, assuming the proposed acquisition was completed on 1 January 1999 based on the unaudited results of the Group for six months ended 30 June 1999, is shown below:-
|
Before Acquisition & Placement
|
After Acquisition & Placement
|
Change
|
|
NTA (S$)
|
0.13
|
0.13
|
-
|
|
EPS (cents)
|
1.6
|
2.3
|
+0.7
|
- Directors' and Substantial Shareholders' Interest
None of the directors of CSE have any interest in W-I. To the best of CSE's knowledge, none of its substantial shareholders have an interest, whether direct or indirect, in W-I.
BY ORDER OF THE BOARD
YVONNE CHOO
JOINT COMPANY SECRETARY
Date : 18th January 2000
Submitted by Yvonne Choo, Company Secretary on 18/1/2000 to the SG
|
