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NEWS RELEASE
CANADIAN CRUDE SEPARATORS COMMENTS ON NEWALTA’S DIRECTORS’ CIRCULAR
Newalta’s Directors’ Circular shows a complete lack of understanding of CCS’ Offer
Higher CCS gross margins and growth rates show how shareholders will benefit from CCS’ management approach
CALGARY, May 24, 2001 – Canadian Crude Separators Inc. (“CCS”) (TSE:CCR) announced today that it has reviewed Newalta Corporation’s (“Newalta”) (TSE: NAL) Directors’ Circular dated May 17, 2001. As a result of this review, CCS has determined that Newalta’s actions, or the lack thereof, in its defense against CCS, are designed solely to secure the continuance of the management of the company. Furthermore, Newalta’s statements suggest a complete lack of understanding of the quality, attractiveness and value of the consideration being offered by CCS to Newalta shareholders under the Offer.
The consideration being offered:
Under the terms of the Offer announced on May 2, 2001, Newalta shareholders will receive 0.52 of a 7.40% Cumulative Redeemable Convertible Series B Preferred Share (the “Convertible Preferred Share”) of CCS for each Newalta common share, and 0.52 of a Series B Preferred Share Purchase Warrant for each Newalta Common Share Purchase Warrant. Based on the current CCS Common Share Price of $7.40, and an implied Convertible Preferred Share value of approximately $8.30, the CCS Offer represents a price of approximately $4.31 per Newalta Common Share. This represents a premium of over 37% to Newalta’s share price of $3.15 prior to the announcement of the Offer.
The benefits of the Convertible Preferred Shares:
Mr. David Werklund, Chairman, President and Chief Executive Officer of CCS said, “Our use of Convertible Preferred Shares in our Offer enables Newalta shareholders to realize the upside in CCS Common Shares through the conversion feature. Each Convertible Preferred Share is convertible at any time, at the option of the holder, into one CCS Common Share. At the same time, the Offer provides a 7.4% annual dividend, or $0.555 per share. In addition, the Convertible Preferred Shares provide “downside protection” in that, absent a conversion, Newalta shareholders will receive value equal to the issue price of $7.50 for each Convertible Preferred Share not later than the fourth anniversary from the date of issue. The listing of the Convertible Preferred Shares on The Toronto Stock Exchange will provide Newalta shareholders with no less liquidity in the marketplace prior to the conversion of those shares, and increased liquidity once those shares are converted into CCS Common Shares. In essence, the Convertible Preferred Shares are equivalent to CCS Common Shares with the added benefit of a $0.555 annual dividend, payable quarterly, and “downside protection” for Newalta shareholders. The Convertible Preferred Shares represent, and are treated as, pure equity on CCS’ balance sheet. Consequently, Newalta shareholders will participate in a combined company with a stronger balance sheet and greater size than they currently enjoy.
“Newalta is showing a complete lack of understanding of the Convertible Preferred Shares by failing to recognize that the 7.4% annual dividend plus the downside protection afforded investors give these securities a value which is higher than the traded price of CCS Common Shares. Newalta’s attempts to value the CCS Offer solely on the basis of the CCS Common Share price is clearly misleading as it fails to recognize the additional value inherent in the Convertible Preferred Shares.”
Newalta’s operating performance has been anything but satisfactory:
In opposing the CCS offer, Newalta states that “Newalta’s current management team has a proven track record of successful strategic planning and of delivering superior financial results.” CCS fails to understand how the facts support this conclusion. The following table outlines the significantly higher gross margins realized by CCS versus Newalta in recent years and in their Q1, 2001 results:
DIVISIONAL GROSS MARGIN ANALYSIS
2001-Q1 2000-Q1 2000 1999 1998 1997
($ 000's)
CONSOLIDATED
CCS
Gross Margins 14,478 8,624 32,517 17,516 16,813 12,147
Gross Margin % 53.9% 46.0% 47.9% 38.3% 39.7% 37.9%
Newalta
Gross Margins 7,680 6,341 24,107 15,715 14,366 23,849
Gross Margin % 34.3% 33.9% 30.7% 26.7% 26.2% 37.3%
Difference: 19.6% 12.1% 17.2% 11.6% 13.5% 0.6%
OILFIELD WASTE MANAGEMENT
CCS
Gross Margins 11,042 6,668 27,579 14,268 12,625 8,444
Gross Margin % 63.8% 58.2% 58.1% 48.3% 48.5% 42.7%
Newalta
Gross Margins 7,791 6,117 21,798 13,136 12,047 20,049
Gross Margin % 45.8% 44.4% 34.2% 28.8% 35.4% 45.0%
Difference: 18.0% 13.8% 23.9% 19.5% 13.1% -2.3%
OTHER
CCS - Service Rigs
Gross Margins 3,436 1,956 4,938 3,248 4,188 3,702
Gross Margin % 36.0% 26.9% 24.2% 20.1% 24.2% 27.7%
Newalta - Industrial
Gross Margins 1,210 931 2,309 2,579 2,319 3,800
Gross Margin % 20.7% 17.4% 13.9% 18.1% 11.1% 19.4%
Difference: 15.3% 9.5% 10.3% 2.0% 13.1% 8.3%
The above table demonstrates that it is CCS’ management team that has the successful track record, not Newalta’s management team. It further demonstrates that Newalta’s initiative of attempting to grow its industrial waste management business, which Newalta continues to emphasize, has been a failure characterized by low gross margins and low profitability.
Newalta has previously stated that “The Board believes that the implementation of Newalta’s business strategy represents the best means of achieving value for Newalta’s shareholders”. Here too, the facts do not support this conclusion. The following tables outline the Q1, 2001 results and the significantly higher compound annual growth rates (“CAGR”) recorded by CCS versus Newalta in recent years. As the tables clearly show, CCS, which had revenues equal to only 50% of Newalta’s revenues in 1997, had revenues equal to 120% of Newalta’s revenues in Q1, 2001. Relative growth rates in EBITDA, cash flow, earnings and EPS have been even more spectacular.
FIRST QUARTER RESULTS COMPARISONS
% Growth 2001-Q1 2000-Q1
($ 000's except per share amounts)
Revenue:
CCS 43.2% 26,840 18,746
Newalta 19.7% 22,369 18,695
EBITDA:
CCS 72.3% 13,089 7,596
Newalta 22.6% 7,246 5,908
Cash Flow:
CCS 62.3% 8,687 5,352
Newalta 28.4% 6,245 4,863
Earnings:
CCS 87.4% 5,495 2,933
Newalta 51.8% 2,440 1,607
EPS (Fully Diluted):
CCS 45.5% $ 0.32 $ 0.22
Newalta 55.1% $ 0.08 $ 0.05
COMPOUNDED ANNUAL GROWTH RATE COMPARISONS
CAGR 2000 1999 1998 1997
($ 000's except per share amounts)
Revenue:
CCS 28.4% 67,849 45,712 42,349 32,025
Newalta 7.0% 78,421 58,784 54,777 64,015
EBITDA:
CCS 44.5% 28,376 14,083 12,885 9,409
Newalta 0.1% 22,110 14,600 13,267 22,014
Cash Flow:
CCS 36.6% 20,004 11,036 9,744 7,852
Newalta -4.4% 17,902 9,757 8,967 20,482
Earnings:
CCS 42.3% 11,976 4,199 4,311 4,159
Newalta -3.5% 7,718 773 1,479 8,586
EPS (Fully Diluted):
CCS 26.5% $ 0.81 $ 0.31 $ 0.34 $ 0.40
Newalta -8.9% $ 0.23 $ 0.03 $ 0.05 $ 0.30
Newalta shareholders have been misled about Newalta technologies:
Newalta has attempted to communicate that its technology is superior to that of CCS. However, Newalta fails to state that it and CCS offer similar technologies for emulsion treating, oil terminalling, water disposal and tank washing services. Furthermore, CCS and Newalta process oilfield waste material to recover crude oil for sale using different, but non-proprietary, technologies. Newalta’s oil recycling and industrial services sectors utilize technologies that are commonly known and are readily available to other potential competitors. Contrary to Newalta’s assertions, CCS does not engage in land spreading and both CCS and Newalta own and operate landfills and cavern facilities using similar technologies.
Newalta’s poor operating performance is reflected in its poor share price performance:
Newalta’s poor historical operating performance is further reflected in the poor performance of Newalta’s Common Shares. The table below compares the relative performance of Newalta’s Common Shares and CCS’ Common Shares with the TSE Oil & Gas Services Index (the “Index”) for various time periods ended May 1, 2001 (the day prior to CCS’ Offer).
Newalta CCS Index
January, 1998 to May 1, 2001 -66% +33%* +23%
January, 1999 to May 1, 2001 +7% +277% +169%
January, 2000 to May 1, 2001 -10% +267% +76%
January, 2001 to May 1, 2001 +21% +32% +9%
*From February 27, 1998, the date on which CCS was first listed on the TSE.
Newalta’s financial forecast is optimistic and inconsistent with historical performance:
Newalta has provided its shareholders with financial forecasts for the years ended 2001 and 2002. CCS believes the revenue growth in 2001 and 2002 is extremely optimistic requiring Newalta to, among other things, achieve pricing increases of 7% on certain commodity based products, and add an additional 12% growth in revenue from new markets that are not currently serviced by Newalta. Furthermore, Newalta, over the last three years has achieved an average annualized gross margin of 28%. In 2001 and 2002, Newalta is forecasting to achieve gross margins of 35% and 38%, respectively, while indicating their strategy is to develop lower margin non-oilfield waste management markets.
Newalta shareholders to benefit from significant synergic benefits:
While Newalta fails to acknowledge that the combination of CCS and Newalta will result in significant efficiencies and synergies, CCS has identified $14.6 million of pre-tax synergistic benefits that will be realized on an annual basis. CCS will achieve such synergies through the elimination of executive, administrative and operational staff redundancies, improved operating efficiencies at each of Newalta’s treatment facilities, the elimination of excess regional operating and administrative offices, reduced sales and marketing costs and the elimination of all costs associated with being a publicly listed company.
Combined company should enjoy stronger market capitalization and higher multiples:
On a historical basis, the P/E multiple of Canadian oil and gas service companies has been a function, in part, of market capitalization. Based on pre-announcement share prices, the market capitalization of CCS was $125 million (fully diluted) while that of Newalta was $114 million (fully diluted). The proposed transaction would increase the pro-forma market capitalization of CCS to approximately $300 million at closing based on current share prices, significantly greater than that of either company on a stand-alone basis. This market capitalization does not factor in the expected expansion of CCS’ P/E multiple emanating from a greater market capitalization.
Competition Act:
CCS believes that Newalta is wrong in its characterization of the competition issues raised by the CCS Offer. CCS vigorously disagrees with the view of Newalta and is confident that the Competition Bureau will allow the Offer and subsequent merger of CCS and Newalta to proceed without challenge.
Newalta’s strategy is designed to entrench management:
Newalta’s Directors’ Circular makes no mention of any initiatives being undertaken by Newalta designed to maximize value for its shareholders. CCS submits that Newalta’s efforts to remain independent are simply a campaign designed to secure the continuance of Newalta’s management and to deprive its shareholders of the opportunity to benefit from CCS’ Offer.
CCS notes that Newalta’s senior management team owns an aggregate of only 2.5% of Newalta’s common shares and therefore may be insufficiently motivated to take a more objective view towards maximizing shareholder value. CCS urges the Newalta Board of Directors to objectively consider the significant operating synergies and shareholder value that could be realized through a business combination that truly serves the interests of the shareholders of both companies.
The timeframe:
The CCS Offer is open for acceptance until 3:00 p.m. (Calgary time) on June 8, 2001 unless withdrawn or extended.
About CCS:
CCS is a Calgary-based oilfield services and waste management company, operating through two divisions. The Treatment and Disposal division, representing 70% of the Company’s revenue, offers treatment, recovery and disposal of oilfield by-products through 21 facilities serving light and heavy oil areas in Alberta and Saskatchewan. The well servicing division maintains a fleet of 39 service rigs providing well completion, maintenance, workovers and abandonment services in northwestern Alberta, northeastern British Columbia and southeastern Saskatchewan.
I don't know, but this deal looks better for NAL all the time.
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