Edgen Group - Sumitomo Offers Shareholders A Big Premium, And Profitable Exit Opportunity

| About: Edgen Group (EDG)

Shares of Edgen Group (NYSE:EDG) spiked up on Tuesday after the energy sector holding company announced that the company sold itself to Japanese conglomerate Sumitomo, barely 18 months after being listed on the stock exchange.

Given the high leveraged employed by the firm and poor market conditions, investors should be happy to receive such a big premium for their holdings, as the deal offers a profitable exit opportunity for investors participating in the public offering.

The Deal

Edgen Group announced that it has entered into a definitive merger agreement under with the company has agreed to sell itself for $12.00 per share in cash to Sumitomo Corporation and Sumitomo Corporation of America.

Edgen's highly engineered steel products and expertise in complex applications used in oil and gas drilling will be implemented with Sumitomo's existing businesses to create superior offerings.

Edgen employs some 660 workers at over 35 locations in over 18 countries.

CEO Dan O'Leary which will continue to lead the business commented on the rationale behind the sale, "The opportunity to align the Edgen Group strategy with the Sumitomo organization will benefit both businesses. The Edgen Murray and Bourland & Leverich commercial brands are well established and can now bring even greater scale to serve customers throughout global energy end-markets."

The deal is subject to normal closing conditions including regulatory approval and is expected to close before the end of this year.


Edgen Group ended its second quarter with $13.3 million in cash and equivalents. The company operates with roughly $670 million in total debt, for a significant net debt position.

Revenues for the first six months of the year came in at $837.6 million, down 16.4% from the year before. The company reported a $5.6 million loss on the back of $29.7 million in net interest expenses. In general, lower global rig counts are to blame, causing operating conditions for the firm to work in.

At this pace annual revenues could come in around $1.7 billion, while the company is likely to report a small GAAP net loss.

The $520 million price tag of the deal, according to Sumitomo, combined with the debt position of around $655 million, values the enterprise at some $1.18 billion. This values the businesses at some 0.7 times annual revenues.

Edgen Group does not pay a dividend at the moment.

Some Historical Perspective

Edgen Group has gone public as recent as April of 2012, when it sold shares to the general public at $11 per share, below the initial guided price range of $14-$16 per share.

Shares had fallen to lows of $6 at the start of the summer of this year on dismal profitability and falling revenues. Shareholders stand to receive a 58% premium on the back of the announced offer. Fortunately for them, shareholders manage to get out at a relatively good level, witnessing returns of 9% over the past 18 months.

Investment Thesis

It has been a short, but slightly profitable ride for Edgen's shareholders, who should be glad that the Japanese firm was willing to pay such a fat 58% premium for the business.

With the deal Sumitomo will further expand it distribution business, as Edgen is focused on the distribution of pipes and valves, among others. Note that Edgen was having a rough year as revenues were falling quite dramatically, forcing the company reported small GAAP losses.

Adjusted EBITDA of $49 million for the first half of the year, values the business around 12 times that metric on an annual basis, after extrapolating current profitability trends to the remainder of the year. The Japanese firm should be able to benefit significantly from refinancing Edgen's debt at lower rates. Note that Edgen paid nearly $30 million in interest in the first half of the year, for an effective cost of debt of around 9% on an annual basis.

While Edgen could have seen better days on a stand-alone basis, the competitive position was severely impacted by the high leverage employed in relationship to its earnings. I think investors should be grateful and tender their holdings, after receiving a fat premium, and profitable exit opportunity, in an otherwise troubled firm.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.