SINGAPORE (Oct 7): Catalist-listed lubricant manufacturer and trader United Global has sold a 40% stake in its subsidiary United Oil to Repsol Downstream Internacional, part of Spanish oil giant Repsol for US$46.5 million ($64 million).
Upon completion of the deal, United Oil will become a jointly controlled entity under Repsol, for the latter to expand into Southeast Asia. With net proceeds of some US$36 million, United Global is now on the lookout for investments and acquisitions of its own, and wants to venture beyond its existing markets in Singapore, Malaysia and Indonesia, says Jacky Tan, the company’s CEO and executive director, in an interview with The Edge Singapore.
Under the terms of the deal announced on Sept 30, Repsol will be paying up to US$46.5 million in cash for the stake in United Oil. The payment will be split into two tranches: an initial US$36.5 million, while the remaining US$10 million will be payable depending on revenue-related earn-out targets for FY2023.
Both Repsol and United Global see plenty of upside in coming together. Repsol will be focusing on production and marketing of oil derivatives; United Global will look into blending, manufacturing and distributing lubricants. The partners hope to go after the higher-end segment of the market. “We want to look into the entire supply chain and ecosystem as an energy provider,” says Maria Victoria Zingoni, executive managing director of commercial business and chemicals at Repsol.
Repsol, listed in Madrid, has a market value of €22.2 billion ($33.6 billion). It produces more than 700,000 barrels of oil a day. The company has been eyeing the developing markets in Southeast Asia, which have growth potential in contrast to the relatively saturated markets of Europe. For example, it is estimated that there are 1,000 cars per 1,000 inhabitants in Europe, but the corresponding ratio for Southeast Asia is 200 cars.
According to data on lubricants from research firm Ipsos, demand in Europe declined to reach 15% to 25% of global market share in 2015, while that in North America showed similar trends. Meanwhile, demand in Asia has increased from 30% to 35% in 2015 to 40% to 45% in 2017 — with annual consumption of lubricants in the region hitting 19 billion to 23 billion litres in 2017. Zingoni says: “There is room for growth and more opportunities to tap [in the region], and we recognise that the lubricant business here is underdeveloped.”
According to Zingoni, Repsol had been on the hunt for a “good and strong” Southeast Asian company to collaborate with, and it eventually decided on United Global because it “has everything we are looking for”.
She is most likely referring to United Global’s team, which has a good understanding of the industry and capabilities; strong distribution networks; and transparency. While she suggests that there may be challenges from having to integrate two business cultures, she says this is normal and she is reassured by the “common values” that both companies share.
Repsol’s investment in United Oil comes about a year after its 40% acquisition of Bardahl, an automotive fluids and lubricants company in Mexico. Bardahl has a broad network consisting of 40 branches with more than 700 sales representatives and 10 exclusive distributors, giving it a market share of 6% in Mexico. Repsol will invest about €400 million to open between 200 and 250 service stations in Mexico annually, and aims to lift Bardahl’s market share to between 8% and 10%. The acquisitions of Bardahl and United Oil are part of Repsol’s “Do it for me” model of finding strong local partners to capture the respective markets around the world.
Unlike most Singapore-headquartered, export-oriented companies, United Global has not been severely hit by the ongoing trade tensions between the US and China as well as the oil jitters in the Middle East.
On Aug 7, the company recorded earnings of US$2.5 million for 2QFY2019, up from US$898,000 in the year-earlier quarter. This comes on the back of a 60.8% y-o-y increase in revenue to US$39.4 million in the same period. The company attributes the higher revenue to higher trading volumes, while the bottom line was boosted by higher margins from the manufacturing of lubricants.
There was a weak spot, though. Revenue from manufacturing in the quarter was down 10.4% y-o-y to US$21.6 million. United Global attributes this drop to slower demand in Indonesia. Tan is restructuring the sales team there and also improving the quality of production in the country.
He says the outlook continues to be challenging. He will aim to keep operating costs down so that earnings are not further compromised. Now, with Repsol’s investment, he is looking for business opportunities.
As at June 30, the company’s net asset value per ordinary share rose 10.4% to 12.7 US cents. So far this year, United Global shares are up 12.8% to close at 48.5 cents on Oct 3. At this level, its shares are trading at a historical price-to-earnings ratio of 12.11 times, valuing the company at $153.4 million. In an Aug 20 report, SAC Advisors, sponsor of United Global, had a “hold” call and price target of 50 cents on the stock.
