Dietswell’s changing fortunes:

Private Equity and IPO. What next?

Case study
Not for diffusion outside of class

Note: This handout is not a “solution”. Class discussion

is likely to cover some issues not in this handout, and
not to cover some of the issues it contains.

Marc Kitten
m.kitten@imperial.ac.uk
(connect on LinkedIN or Xing)
POTENTIAL ISSUES RELATED TO FORMS OF OWNERSHIP

• Lack of capital for a private form of ownership, even once backed by a

PE investor. Difficulty to access traditional forms of financing, especially
when exposed to emerging markets.
• How a financial investor (Truffle) plays a strategic role in contributing to
finance the long term projects and provides some strategic advice
(personal experience and network)
• Disclosure obligations and loss of control after listing,
• Corporate governance issues: potential short-termism of PE investors,
potential conflicts of interest for the management reporting to both a
large financial investor and the public market, larger shareholders’
conflicts in DMM.

Source: Case 4
POSITIONING

Gross Net
Operation Costs Value Percent
Margin Margin
Exploration 2.97 16.33 16.33 13.36 36% Dietswell seems to
operate in the most
Production 17.78 49 32.67 14.89 41% profitable and value-
adding segments of the
Transportation 1 51.96 2.96 1.96 5%
oil and gas value chain
Refining 3.7 60.46 8.5 4.8 13%
Distribution 1.9 63.69 3.23 1.33 4%
Marketing 0.8 64.85 1.16 0.36 1%
Pump Taxes 19.15 84 0 0 0%
TOTAL 36.7 100%

Source: www.petrostrategies.org 5
EXTERNAL VALUE DRIVERS

• After some difficult years, dayrates are anticipated to grow at about 4% annually for
jackups. When looking at capabilities and water depths served, premium jackup
dayrates should grow even faster.
• Looking solely at the rig counts, global offshore activity is improving slightly. The
lecturer can mention that there are now 543 rigs under contract around the world, up
ten from the previous month, and that the overall fleet size also grew during the
month by a net five rigs (3 floaters and 2 jackups) to 756 rigs marketed globally.
• It is also worth mentioning the reliance upon majors. Most of the work is contracted
with a small number of international clients, much larger than Dietswell. The company
is always at risk of being squeezed in the middle.

Source: Case 6
DIETSWELL’S CLIENTS IN 2012

Source: Management presentation, 2012 7

POSITIONING GOING FORWARD

Management must decide whether they forecast demand for drilling

services to increase again. Fixed costs have already been reduced and to
increase the activity would require a strong focus and new investments
that the company is ill-equipped to make at that stage. Unless
shareholders (i.e. Truffle) want to put more cash in the company, it seems
reasonable to focus on the other activities which are significantly less
capital intensive.

Source: Case 8
REINFORCED FOCUS ON NON CAPITAL INTENSIVE ACTIVITIES
2012 Q3
Services
Contracting net of services
Revenue in €m
20 18.7
18
16 15.5
14.5 In late 2012, the
14 expected
12 12.1 contribution of the
12
non-service part of
10 9.1 Contracting was
8 reduced significantly
6.2 6.5
6
4
2.1
2
0.5
0 0
0
2007 2008 2009 2010 2011 2012E

Source: Management presentation, late 2012 9

1. VALUATION: SHARE PRICE STORY

Limits in the case of an SME

• High volatility and
unpredictability of the
performance,
• Limited internal resources to
inform the market,
• Limited analyst coverage,
• Limited liquidity of the stock

Source: Case 10
1. VALUATION: IMPLIED SHARE PRICE TO SATISFY TRUFFLE

Truffle's investments 2005 2007 2010 2011

Amounts 3,000,000 2,500,000 1,188,000 2,000,000

Expected investment's value as of 2012

Truffle Capital Stake 49%
Shares outstanding 5,303,475

Pursued IRR 5% 10% 15% 20% 25%

Expected Value of Stake 10,821,775 13,509,906 16,879,583 21,081,062 26,290,759
Expected Firm's Market Cap 22,085,255 27,571,237 34,448,128 43,022,576 53,654,611
Implied Share price 4.16 5.20 6.50 8.11 10.12

Source: Case TN1 (all numbers assumed computed at mid year) 11

1. LIMITS OF RELATIVE VALUATION IN THIS CASE
• Difficult to find true comps due to high degree of diversification at Dietswell
• Negative operating and financial performance at Dietswell in 2011: use forward
EBITDA (but need to convince investors of the soundness of the recovery plan and of
the solidity of those estimates)
• 2012 and 2013 forward EBITDA provide very different values because the company
performance will recover over several years: 375K in 2012E vs 1141K in 2013E
• Price to Sales is never an ideal measure O&G E&P AD* Industry
EV/Sales 1.26 1.88
But let’s try with €12M revenue Implied Dietswell EV 15,226,257 22,718,542
Dietswell net debt (June 30) 1,639,167 1,639,167
Implied Dietswell Equity 13,587,090 21,079,375
Implied price per share 2.57 3.98
Net Earnings - 1,271,293
EPS -0.24
# shares 5,297,054.17

* Oil and Gas Exploration and Production Plc from Bulgaria deemed best comparable as other comps much bigger
Source: Case SN12 12
1. DCF – WACC CALCULATION

Beta Calculation "Industry" "Sector"

• We don’t trust the beta of Dietswell, which
Industry levered beta 1.29
Sector levered beta 0.84 has proven to be way too volatile
Industry Debt/Equity 44% 20%
Industry tax rate (t)
Industry unlevered beta
12%
0.93
12%
0.71
• Use the industry and sector betas (need
more information on their definition). This
Dietswell D/E 21.05% 21.05%
Marginal tax rate 33.33% 33.33% can be used as a first range
Dietswell Beta (levered) 1.06 0.81
• Unlever and relever the betas
Discount rate Beta=1.06 Beta=0.81
Risk-free rate 2.50% 2.50%
Market premium 5.50% 5.50%
Ke 8.33% 6.9799%

Cost of debt 5.60% 5.60%

Tax rate 33.33% 33.33%
Kd 3.73% 3.73%

Equity Market Value 7,424,865 7,424,865

Net debt (June 30) 1,639,167 1,639,167
WACC 7.50% 6.39%

Source: Case 13
1. DCF – FCFF
• We use the assumptions provided by the management (8.7% growth in 2016-2018, 3% perpetual growth)
• Valuation as of 1 July 2012: discount FCFFs for 6 months, 1.5 years, etc. Also account for only half the 2012 FCFF
Free Cash Flow=EBIT (1-tc) – (CapEx – Depreciation) - Change in Net Working Capital

Assumptions: Sales growth 2016-2018: 8.7%; EBIT 2016-2018: 8% of sales; Capex 2012-2018: 4% of sales, change in NWC 2016-2018: 2% of sales
2012 2013 2014 2015 2016 2017 2018
Sales 18,207,612 25,043,522 31,939,860 39,407,268 42,835,700 46,562,406 50,613,336
yoy 8.70% 50.7% 37.5% 27.5% 23.4% 8.7% 8.7% 8.7%
EBIT 17,362 162,001 729,462 1,710,443 3,426,856 3,724,992 4,049,067
EBIT margin 8.00% 0.1% 0.6% 2.3% 4.3% 8.0% 8.0% 8.0%
Tax 5,787 53,995 243,130 570,091 1,142,171 1,241,540 1,349,554
EBIAT 11,575 108,006 486,332 1,140,352 2,284,685 2,483,452 2,699,513
D&A 358,340 979,635 1,005,924 1,041,580 1,131,727 1,229,676 1,336,102
%D&A/Sales 2.0% 3.9% 3.1% 2.6% 2.6% 2.6% 2.6% Assumption to make
Capex 728,304 1,001,741 1,277,594 1,576,291 1,713,428 1,862,496 2,024,533
%Capex/Sales 4.0% 4.0% 4.0% 4.0% 4.0% 4.0% 4.0% 4.0%
'd(WC)=WCt-WCt-1 730,214 817,131 800,391 973,152 856,714 931,248 1,012,267 Perpetuity
dWC/Sales 2.0% 4.0% 3.3% 2.5% 2.5% 2.0% 2.0% 2.0%
FCFF - 544,302 - 731,230 - 585,729 - 367,511 846,270 919,384 998,815 1,028,779
Perpetual growth 3.0%
Years to discount 0.5 1.5 2.5 3.5 4.5 5.5 6.5
WACC and discount factors 7.50% 0.96 0.90 0.83 0.78 0.72 0.67 0.62 0.62
TV=FCFn+1/(WACC-g) 22,861,759
Discounted FCFs - 524,971 - 656,057 - 488,850 - 285,325 611,182 617,661 624,209 14,287,447

EV 14,185,297
Financial debt 3,357,520 Note: this is the financial debt as reported on 30/06/12 (analysts restated it slightly higher)
Cash 1,718,353
Equity Value 12,546,130
Value per share 2.37

Source: Case TN5 14

1. DCF – SENSITIVITY ANALYSIS

Vary the WACC between say 6% and 8%, against a growth rate of 2% to 3.5%

Stok price (€)

growth rate g
WACC 2.00% 2.50% 3.00% 3.50%
6.0% 2.98 3.47 4.12 5.04
6.5% 2.52 2.89 3.37 4.00
7.0% 2.16 2.22 2.81 3.27
7.5% 1.86 2.09 2.37 2.72
8.0% 1.61 1.80 2.02 2.30

Source: Case TN5

15
1. DCF WITH 2015-2018 REVENUE CAGR AT 3% INSTEAD OF 8.7%

We obtain a lower share price! It seems counterintuitive but the reason is simple:
as often, forecasts in the distant years tend to be done “top down”, here as a percentage
of sales, with the exception of the D&A which was calculated “bottom up”, based on the
large Capex of the past and thus fixed.
While everything seems reasonable at first sight, it is arithmetically doomed: the EBIAT
will be a bit more than 5% of sales while the Capex and change in NWC together amount
to a negative 6% of sales. The D&A contributes positively but is fixed.
So, the more sales in 2016-2018, the less FCFF… (students who didn’t follow the
instructions to keep the D&A fixed won’t see the issue)
Conclusion: the assumptions are not all compatible

Source: Case 16
1. SOCCER FIELD

Source: Case 17
2. WHY SELL FACTORIG?

FactoRig offers some synergies with the rest of the

business but unlike Dietswell Services it’s not core
and there are some potential conflicts of interest
when providing audit services to existing clients

Source: Case 18
2. FACTORIG VALUATION - DCF

Tax rate 33%

2012 2013 2014 2015
EBIT(1-t) 196,179 289,784 403,010 556,517
Capex 78,168
Depreciation 26,113 - - -
Change in NWC 104,498 100,320 90,917 107,513 TV
Free Cash Flow 39,626 189,464 312,093 449,004 10,275,538
WACC 7.5%
g 3.0%
PVs 36,861 163,947 251,218 336,205 7,694,119
NPV 8,482,350

• Most of the value of Dietswell seems to be within FactoRig…

• However due to combination of a very aggressive top line growth, low
increase in NWC (assumed in line with the rest of the company) and no Capex
Source: Case 19
2. FACTORIG VALUATION - MULTIPLES

More reasonable? Multiple of 8x EBITDA observed in the

market (Moduspec transaction). If we accept the €295K
forward EBITDA 2012E, we get an EV of close to €2.4m
(way below 8.4m)

Source: Case 20
2. FACTORIG VALUATION – SGS OFFER

• €350K SGS offer doesn’t look exciting for half of the business
• Other half of the offer doesn’t add much value, on the contrary:
• SGS is de facto granted a call option. That call option should be
considered as a cost that reduces the value of the €0.35K
upfront payment.
• SGS may decide not to buy the other half and they would
probably not exercise their option just when the shareholders
would need the money most!

Source: Case 21
2. FACTORIG VALUATION – TRUFFLE OFFER

• The counteroffer by Truffle is marginally better financially: €0.5m

immediate cash and a higher 8x multiple (instead of 7x or 5x) if they
exercise their call option.
• However, Truffle doesn’t bring additional potential commercial and
strategic value – if any - as they are already a shareholder.
• There is also a potential conflict of interest: this deal could be
perceived by the 33% of market investors as a manipulation and
possible transfer of value between two dominant shareholders with
insider knowledge (Truffle and management) at their expense.

Source: Case 22
WHAT HAPPENED

Later in 2012, Jean-Claude Bourdon stepped down as CEO to

concentrate on the restructuring of Dietswell Contracting
Pierre Laborie replaced him until 2017, at which time he left the
company and Jean-Claude Bourdon became CEO again

Source: Case 23
DIETSWELL’S REVENUE EVOLUTION IN 2012-2016 – BP VS. ACTUAL BP 2012
€m Actual

45
42.8
40 39.4

35
31.9
30
28.2 28.2

25 25.2 25

20 20.7
18.2
17.3
15 14.4
15.2
12.1 12.5
11.6
10 9 9.2
7.5
6
5 4.5
3
2
0
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

Source: BP 2012; Annual reports 24

DIETSWELL’S REVENUE EVOLUTION IN 2012-2016 – BP VS. ACTUAL
€m

31-12-11 31-12-12 31-12-13 31-12-14 31-12-15 31-12-16

Turnover 12.08 15.25 17.33 28.19 28.15 12.49
of which export 6.9 0 9.58 20.82 24.73
Financial revenue 1.27 0.18 0.1 0.15 0.52

Operating costs 13.82 15.93 17.31 27.39 26.72 13.37

Staff costs 7.58 8.17 8.36 10.82 11.18 6.31
EBITDA -1.18 0.01 0.4 1.82 2.29
Financial costs 0.06 0.19 0.16 0.16 0.65
Profit before tax and extraordinary items 0 -0.32 0 1.4 1.47
PBT 0.27 0.27 -12.06 1.48
Net income -1.68 0.32 0.33 -12.01 1.39 -4.52

Staff # 61 69 84 84 56
Sources: company accounts; analyst reports

25
DIETSWELL’S ACTUAL PERFORMANCE IN 2012-2016 Revenue
€m EBITDA
Net Income
35

30 28.2 28.2

25.2
25 Significant
reduction of the
20.7 activity in all
20 business units
17.3
15.2
14.4
15 12.5
11.6 12.1

10 9.2

5 3
1.6 1.3 1.8 2 1.4
0.4 0.3 0.4 0 0.3 0.4 0.3 0.1
-1.4 -1.2 -1.7 -1.2
0
2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016
-1.7
-5 -4.5
-5

-10
-12
-15
Source: Annual reports 26
EVOLUTION OF SHARE PRICE AFTER 2012
€

Source: advfn.com 27
WHAT HAPPENED

On March 15th, 2017, TRUFFLE Capital announced the sale of all its shares of
Dietswell. As of March 29th, Cogefi Gestion owned 42.66% of the shares

In 2017, Dietswell
was clearly trying to
diversify away from
O&G and was testing
a sea platform for
wind turbine.

Source: Press search 28

IN 2020, THE COMPANY RENAMED AS DOLFINES. IT HELPED… FOR A WHILE

Source: press search 29