Regency Energy Partners LP (Nasdaq: RGNC) has agreed to acquire CDM Resource Partners LP, a Houston, Texas-based provider of turnkey natural gas contract compression services. The deal is valued at $655 million. CDM is currently in registration for an IPO, but is expected to withdraw the filing. It is owned by management and Carlyle/Riverstone Global Energy & Power Fund II.
Regency Energy Partners LP (NASDAQ:RGNC) is set to become the first major midstream company to acquire a natural gas compression service firm. Regency has executed a definitive agreement to purchase Houston-based CDM Resource Management, Ltd. (“CDM”), a provider of natural gas compression services. The transaction is valued at $655 million, subject to certain adjustments and customary conditions at closing. Regency expects the CDM acquisition to be immediately accretive to cash available for distribution.
With the acquisition, Regency expects to add a rapidly growing, complementary fee-based business segment and gain significant opportunities to realize synergies in its existing areas of operation. CDM also presents growth opportunities for Regency in new regions, including South Louisiana, the Barnett Shale in North Texas, and the Arkoma Basin in West Arkansas.
CDM provides customers with turnkey natural gas contract compression services and operates approximately 540,000 horsepower of field compression in Texas, Louisiana and Arkansas. It is a leader in large horsepower natural gas compression applications with 82 percent of its operating fleet represented by compression units of more than 1,000 horsepower. Following the closing of the deal, Regency will operate more than 700,000 horsepower of compression.
“With this acquisition, we are expanding the scale and scope of our capabilities, securing a stable, fee-based cash-flow stream and creating a steady source of long-term organic growth projects,” said James W. Hunt, chairman, president and chief executive officer of Regency. “CDM is a service-minded company with strong core competencies, a unique business model and a strong team culture. Led by its current management team, CDM will operate as a subsidiary of Regency.”
CDM provides customized combinations of natural gas contract compression services with a modern and efficient compressor fleet. Natural gas contract compression services include operations and maintenance service, with what CDM believes to be an industry leading 98 percent runtime. The company uses standardized, modern equipment, working to create greater operational efficiencies and lower environmental emissions.
“CDM has experienced significant growth over the past three years, expanding its operating compressor fleet from 180,000 to more than 500,000 horsepower today, with an increase in large horsepower installations with long-term contracts,” said Randy Dean, president of CDM. “Regency's leadership and resources complement CDM's business model and offer additional opportunities for revenue growth.”
“As a subsidiary of Regency, CDM will continue to operate with the same management team and company culture that has produced these outstanding results,” Hunt said. “Jointly, we expect our two service-oriented cultures to offer our customers greater opportunities to enhance their bottom line, and thus grow Regency's business.”
Regency will fund the transaction through $446 million of bank debt, $205 million of deferred-pay limited partner units issued to the owners of CDM, and a $4-million capital contribution by the general partner of Regency in order for it to maintain its current ownership level. The new Class D units will be issued at a 7.5 percent discount to the common units of Regency (as calculated pursuant to the definitive agreement), and will not participate in four distribution periods following closing and will thereafter be converted to common units, on a one-for-one basis. The units to be issued in the acquisition will be held by CDM management and affiliates of Riverstone Holdings L.L.C. and The Carlyle Group. CDM's management team has agreed to retain their units for a minimum period of two years and will participate in Regency's management incentive programs. Riverstone Holdings L.L.C.'s and The Carlyle Group's units will be subject to a lock-up agreement for a period of one year.