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Kirby's Takeover of Stewart & Stevenson Said 'Shrewd Move' As North American OFS Recovers

Houston's Kirby Corp. and Stewart & Stevenson LLC (S&S), whose manufacturing and services offerings are expanding rapidly in the Permian Basin, Eagle Ford Shale and in Oklahoma, agreed late Tuesday to combine in a deal estimated to be worth close to $710 million.

Kirby, the nation's largest domestic tank barge operator, agreed to buy out the Parman Capital Group subsidiary in a cash-and stock transaction set for completion in 3Q2017. Kirby also services oilfield services (OFS) equipment and remanufactures pressure pumping equipment. S&S, in the global equipment business since 1902, has a broad portfolio that manufactures fracture, rig and seismic equipment.

"The combination of Stewart & Stevenson with Kirby's existing distribution and services business has the potential to unlock significant strategic value, dampen overall volatility in the business, and create a larger organization at an opportune time, as the industry continues to recover from a deep downturn," said Kirby Executive Chairman Joseph H. Pyne.

Kirby's transport system carries petrochemicals, oil, refined products and agricultural chemicals along the Mississippi River System, the Gulf Intracoastal Waterway, the three U.S. coasts, and in Alaska and Hawaii. It also distributes and services engines, transmissions and pumps, and it manufactures/remanufactures OFS equipment for land-based oil and gas markets.

S&S manufactures products for the oil and gas, marine, construction, power generation, transportation, mining and agricultural industries. It also serves domestic and global markets with equipment, rental solutions, parts and service.

Under terms of the merger, Parman would become a major shareholder in Kirby, with Kirby paying half with cash and half with stock. The cash portion of the deal could increase if Kirby's average stock price falls below a trigger level.

The acquisition "significantly expands the geographic footprint and capabilities of our distribution and services business," said Kirby CEO David Grzebinski. "This transaction creates one of the largest distribution networks in the country with the engineering and technological capacity to successfully address the complex requirements of a large customer base in a competitive national and global environment.

"In this period of accelerating demand in the pressure pumping and industrial sectors of the economy, Stewart & Stevenson's leadership in these sectors and its longstanding, close relationships with the world's major industrial companies, provide an excellent opportunity for us to expand our participation in the national and international arenas. We expect this to accelerate diversification of our combined product lines, boost facility utilization and improve productivity."

The acquisition's synergies would kick into high gear next year, as operations are consolidated, Grzebinski said. Kirby estimates synergies of $25 million overall in the first two years.

S&S has four manufacturing facilities that offer fracture equipment, rigs, seismic, switchgear/drive systems and Rail King mobile railcar movers. The rental business has 1,400 pieces of equipment including generators, load banks, forklifts, pumps and compressors.

S&S would complement the Kirby portfolio with a continuous territory across major U.S. onshore basins, particularly in Texas and Oklahoma, and offers opportunities to expand rentals and other end markets.

The combination would expand the geographic presence of Kirby. Distributor territories would be a "natural complement to the legacy distribution and services business," to enhance customer service and support. The merger also achieves "significantly greater size, scale and scope" for Kirby's distribution and services segment.

The revenue mix once combined would be 75/25 distribution/manufacturing, compared to land-based distribution and services businesses that historically are around 50/50.

The timing of the agreement "speaks to the strength of equipment newbuild/remanufacturing demand-pull from North American well site oilfield service providers," said Tudor, Pickering, Holt & Co. Kirby's decision to take over S&S was a "shrewd move," analysts said.

Making a deal at this time "is fortuitous as Kirby's primary facility for manufacturing/remanufacturing pressure pumping spreads is essentially fully booked (from throughput capacity) through the end of this year," analysts said. Given the 5 million hydraulic hp-plus of incremental U.S. pressure pumping demand that TPH analysts believe is on tap over the next 18-plus months, "gaining access to Stewart & Stevenson's oilfield manufacturing/assembly facilities here at the nascent stage of this OFS cyclical recovery will likely prove (in hindsight) to have been a shrewd move."

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