Acquiring a business can be a complex, resource-intensive and time-consuming process, yet attaining the right business can generate substantial value. We have highlighted some key issues that should be taken into account when acquiring an energy and mining company. In part one of our three-part series, we consider the first five:
The Price
Perhaps the most important factor when acquiring an energy and mining company or interest is the price you pay. Many finance professionals will tell you, “Valuation is more of an art than a science.” However, using bespoke valuation methodologies (discounted cash flow analysis, EV/ EBITDA historical transaction multiples and competent person valuations) will ensure a robust position when negotiating a final price.
Knowing the Identity of the Current Owner
Knowing the identity of the current owner may affect the acquirer's bargaining power, and hence purchase price. If you are buying from a listed company, room for negotiation may be limited. If you are buying from a strategic investor who has held it, for example, for a long time or from an owner in financial difficulty, then there may a wider margin for negotiation.
Funding Your Bid
Are you going to fund the purchase through the acquirer’s existing cash resources? Do you need external financing or debt, or are you planning to raise funds through a public offering, or through a listed vehicle? Do you know how much your lender is willing to lend to fund the acquisition, and whether it will be feasible to secure funding based on future guaranteed production by way of an off take arrangement? Do you know the likely timescale and resources required to complete a public offering? These questions need to be answered at an early stage of an acquisition.
Strategic Acquisition
What are the reasons for acquiring? Is it to secure source of supply, as was quite popular for Chinese state-owned enterprises a couple of years ago? It depends on the type of assets, together with key demand and supply drivers. Quality gold, oil and gas assets continue to be sought after.
Robust and Reliable Financial Systems
Once you have acquired the target Company or asset, you will need accurate, timely, reliable and robust management information to place you in the optimal position to manage your acquisition successfully. This will include accurate and timely treasury, work capital and foreign exchange management.
If you feel that the issues highlighted are likely to impact your acquisition or if you would like any further information, please contact us to discuss how we can help.
Look out for part two where we will be highlighting issues including local knowledge, the timing, management and key personnel, business planning and risk management systems.