GAMCO Opposes Dril-Quip’s Merger Scheduled for Vote September 5th
14 Agosto 2024 - 3:30PM
Business Wire
GAMCO Asset Management Inc. (“GAMCO”), an affiliate of GAMCO
Investors, Inc. (OTCQX: GAMI), on behalf of its clients and certain
of its affiliates owns approximately 2,866,654 shares of Dril-Quip,
Inc. (NYSE: DRQ), representing 8.32% of the 34,452,230 outstanding
shares as reported in Dril-Quip’s most recently filed Form 10-Q for
the quarter ended June 30, 2024. GAMCO’s Proxy Voting Committee
(“PVC”) intends to vote “Against” the proposed merger with Innovex
Downhole Solutions (“Innovex”).
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Source: Dril-Quip Amendment to Form S-4
Registration Statement filed on 8/5/24, Page 106
On March 18, 2024, Dril-Quip announced its intention to acquire
and merge with Innovex. At the time of the announcement,
Dril-Quip’s stock price was $23.73. Since Dril-Quip’s announcement
that it will acquire Innovex and through August 13, 2024,
Dril-Quip's stock price has declined 37.5%, while the VanEck Oil
Services ETF (OIH) has declined only 8.3%.
We believe Dril-Quip is worth more as a standalone company. We
believe Dril-Quip's intrinsic value is worth more than its current
stock price. However, the company is planning to issue new shares
near its all-time lows to fund the Innovex acquisition. According
to Dril-Quip's projections in its merger proxy document filed with
the SEC on August 5, 2024, Dril-Quip's financials are improving.
Between 2024 and 2028, Dril-Quip projects its EBITDA will increase
from $71 million to $137 million and generate a cumulative free
cash flow of $330 million (or almost $10/share). Dril-Quip
currently has $189.2 million of cash (or $5.50 per share) on its
balance sheet and no debt. If Dril-Quip achieves its financial
targets provided in the proxy, it will have $519.2 million of cash
by 2028 (or $15 per share), greater than its current market
capitalization. Even though our internal earnings projections are
more conservative relative to Dril-Quip's outlook, we estimate
Dril-Quip's 2025 private market value (PMV) to be $39 per
share.
Among other issues the PVC considered were that Innovex dilutes
Dril-Quip's offshore franchise. Dril-Quip's current revenue mix is
60% offshore and 40% international land. In a normalized offshore
environment, we estimate offshore revenue is closer to 75-80% of
the revenue mix. Offshore activity is increasing, as evidenced by
increased project FID, tree awards, and a tight floater market.
Newco's revenue mix, however, will be less favorable as 39% of its
revenue would be derived from offshore, 33% from U.S. land, and 29%
from international land. As part of Newco, Dril-Quip will be
increasing its exposure to the U.S. onshore market at a time when
growth in U.S. activity is slowing or peaking.
Additionally, the merger weakens Dril-Quip's strong balance
sheet. As of June 30, 2024, Dril-Quip had $189.2 million of cash
and no debt on its balance sheet. Based on latest available
financial information for Innovex, it had net debt of $35.6 million
(consisting of $7.6 million of cash and $43.2 million of total
debt). Before closing of the merger, Innovex will pay its Amberjack
Capital Partners (a private equity firm that currently owns 95% of
Innovex) a $75 million special dividend, which we find to be
excessive. This special dividend will increase Innovex's net debt
position to $110.6 million prior to the merger. Following the
proposed merger, Innovex would have other existing commitments that
will further weaken Newco's balance sheet, such as its intention to
acquire the remaining 80% of Downhole Well Solutions (DWS) that it
doesn’t already own.
For all of these reasons, our PVC intends to vote “Against” the
proposed merger.
GAMCO Investors, Inc., through its subsidiaries, manages assets
of private advisory accounts (GAMCO), mutual funds and closed-end
funds (Gabelli Funds, LLC) and is known for its Private Market
Value with a Catalyst™ style of investment.
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version on businesswire.com: https://www.businesswire.com/news/home/20240814966689/en/
Robert Leininger Chair, Proxy Voting Committee (914)
921-7754
For further information please visit www.gabelli.com
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