The Federal Antimonopoly Service (FAS) has refused to allow the purchase of 100% of Drilling Technologies LLC (the main activity is the production of steel pipes, hollow profiles and fittings) from PJSC Pipe Metallurgical Company (TMK). The head company of “Drilling Technologies” is LLC “TD Hilong Rus”, 99% of which belongs to the Chinese Hilong Energy Ltd.
TMK’s Dmitriy Pumpyansky (65% of shares) planned to buy “Technomash” plant for the production of drill pipes in Nevyansk Sverdlovsk region with a capacity of 32 thousand tons per year, from the Chinese group Hilong Group. TMK filed an application at the end of May, but FAS refused it.
According to FAS, the deal will limit competition in the drill pipe market in Russia “by reducing the number of business entities that are not members of the same group, including the dominant position of TMK and Drilling Technologies in the drill pipe market”.
TMK is the largest producer of drill pipes in Russia, its share exceeds 35%, as underlined by the Antimonopoly Service. At the same time, Technomash is increasing its production capacity in 2018. Thus, “in the case of the transaction, the total share of PJSC TMK and LLC Drilling Technologies in the drill pipe market within the borders of the Russian Federation will be more than 50%,” FAS concluded.
At the same time, FAS approved the acquisition of “Coating Technology” by Hilong (“TD Hilong-Rus”, LLC) , which in February 2018 was created by TMK.
Hilong group was established in 2002 and owns drilling pipe production plants in Shanghai (40 thousand tons per year), Abu Dhabi (18 thousand tons) and Nevyansk, Sverdlovsk region, as well as other oil service assets.
Hilong’s revenue in 2017 amounted to $390 million with profit – $18 million, the markets of Russia, Central Asia and Eastern Europe accounted for 34.1%. The group’s revenue from the sale of drill pipes (51 thousand tons) is about $145 million with an average sales price of $2.6 thousand per ton.
Sales volumes in 2017 more than doubled due to the growth of demand in Russia and Central Asia and the strengthening of the brand’s position in these markets, according to the Hilong report.
Outside of China Hilong sold about 45 thousand tonnes, sales volumes in Russia were not disclosed, but “Tekhnomash” produced 16.5 thousand tons in 2017 (revenue 2.5 billion rubles), and “TD Hilong-Rus” had the same revenue in 2017 with net profit to 6.19 billion rubles.
In the first half of 2018, Hilong sold 23.8 thousand tons of drill pipes for $ 62.7 million (about 21.5 thousand tons — outside China), the average sales price remained at $2.6 thousand per ton.
TMK’s capacity for drill pipes is about 40 thousand tons per year, and the entire market in Russia is about 110 thousand tons. Sources in the industry remind that despite TMK’s debt (net debt at the end of June — 3.95 EBITDA) it plans to reduce the debt burden, the company is considering various acquisitions and joint ventures.
Experts do not exclude that TMK will continue its attempts to acquire Hilong business in Russia or create a joint venture. For example, UMMC only received FAS approval for the consolidation of the Chelyabinsk zinc plant for the third time.
Judging by the financial indicators of Technomash, the profitability of sales of its drill pipes is about 22%, and the company’s EBITDA margin should be at the level of 25%. The asset can be estimated at 4-5 EBITDA, or 2-2. 5 billion rubles, if it comes to the transaction, it can be an interesting niche acquisition for TMK.
But the sales market in Russia is limited: based on the data of the FAS and companies, its volume in money can not exceed 20 billion rubles.