Mitchell Services to acquire Deepcore Holdings for $32m

Mitchell Services (ASX: MSV) will acquire privately-owned Deepcore Holdings Pty Ltd for $32 million under a binding agreement announced this morning, with Mitchell claiming the combined entity will be one of the largest pure play drilling service companies in the country.

In consideration for the acquisition, Mitchell will pay $15 million in cash and issue a further 250 million shares at $0.068 each. According to Mitchell, the purchase is based on Deepcore’s net debt at settlement being no more than $12 million.

Overall, the equity acquisition price for Deepcore is $32 million, but with the debt included – the acquisition gives Deepcore an enterprise value of $44 million.

Mitchell noted this represents an acquisition price of 3.52 times Deepcore’s forecast FY 2020 earnings before interest tax depreciation and amortisation of $12.5 million.

As a result, Mitchell anticipates the acquisition will be 38.5% earnings per share accretive based on anticipated financials.

The acquisition is expected to be completed before the end of the year, with Deepcore’s vendors to own 12.5% of Mitchell post acquisition.

Additionally, Deepcore’s Scott Tumbridge will join Mitchell’s board as an executive director and he will hold a 7.2% stake in the combined company.

Mitchell will fund the $15 million cash component of the purchase through debt, with National Australia Bank already providing credit approval.

Acquisition strategy

The strategy behind the acquisition is Deepcore’s unique client offering including possessing 32 rigs on hand to service Australia’s eastern states.

Deepcore provides underground, surface and acoustic drilling services across both infrastructure and mining sectors – with a focus on gold and copper explorers and miners in New South Wales and Victoria.

Mitchell anticipates this will fill its own service gap where it only has a small presence in these regions.

It is expected post-acquisition, Deepcore’s brand and operating structure will remain unchanged, with the combined company forecast to bring in $190 million in revenue for FY 2020.

Investors reacted positively to the news – pushing Mitchell’s share price up 12.5% to $0.063 in early morning trade.