Dawson Geophysical (ticker: DWSN), a leading provider of U.S. onshore seismic data acquisition services, announced a proposed merger with TGC Industries (ticker: TGE) on October 9, 2014. TGC is also involved in the seismic field and has operations in Canada and the U.S. Midcontinent.

Nuts and Bolts of the Deal

The boards of both companies have approved the proposed merger, which involves:

  • Required approval by 66.67% of holders in terms of outstanding shares for both companies. The boards of DWSN and TGC own approximately 2.40% and 28.89% of respective outstanding shares.
  • A tax-free stock-for-stock transaction. Pro forma for the transaction, DWSN and TGC shareholders will own approximately 66% and 34% of the combined company, respectively.
  • A one-for-three stock split by TGC immediately prior to the transaction, which will provide enough TGC shares to finalize the deal. DWSN shareholders will receive 1.76 shares of TGC following the split. TGC shares closed at $3.40/share up 1.95%. Based on the deal terms, the implied valuation of the current Dawson shares should be three times the trading price of the TGC shares multiplied by 1.76. Dawson’s stock closed at $17.74/share, up 0.97%, nearly in line with the implied valuation.

Dawson will retain its name upon completion of the merger and continue to trade on NASDAQ under the ticker DWSN.

The New Dawson

DWSN’s corporate structure will merge the boards of the two companies. In all, the eight-member board will include five Dawson members and three of TGC. Stephen Jumper, Dawson’s Chairman, President and Chief Executive Officer, will continue to operate under the same title.

The new Dawson will consist of a combined market cap of $216.96 million (DWSN and TGC respective market caps at the close of today’s market were $141.29 million and $75.67 million).  Dawson’s market capitalization was $244.94 on June 13, 2014.  The combined balance sheets will consist of $82 million in cash equivalents and $90 million of working capital. Its total debt will be $28 million, equating to a debt-to-market cap ratio of 12%.  Dawson instituted a dividend on February 3, 2014. With the closing of this transaction expected in Q1’15, the implementation or continuation of a dividend policy for the new Dawson will be at the discretion of the new board.

Utilization is the Key

Jumper singled out three essential points of the merger in a conference call following the release: Increased utilization, lower costs and shorter cycle times. “Here at Dawson, our demand has been steady, but we’ve encountered difficulty in maintaining a high level of utilization due to project delays,” said Jumper. “The new Dawson order book, combined with expanded equipment base, geographical diversity and logistical advantages, should enable us to increase utilization rates while simultaneously lowering cost within the U.S. and across the Canadian border.”  Reported crews for Dawson were eight to nine for the Q1’14 reported period, down from 12 crews for the corresponding 2013 quarter.

Jumper added the larger order book will cut down on crew mobilization costs and reduce the need to bring in third-party rentals for equipment. “It will not be an overnight process,” said Jumper. “But each and every day we avoid being down, we improve the efficiencies that increase utilization.”

He also touched on expanding into Canada, where TGC currently has a foothold under the name Eagle Canada (which will continue to be used). Dawson said it had 10 active U.S.-based crews in September, but its expansion into the great white north is still in the early stages and consists of one crew. TGC, on the other hand, has three crews running with expectations to add another in Q4’14 and eventually reaching five or six total crews by Q1’15.

Management for both companies did not provide guidance but said each organization is building backlog for the upcoming months. Jumper said the new Dawson will evaluate the best way to utilize its crews once the projects line up. “We believe the combination of Dawson and TGC results in a company which the sum is greater than the part,” he said.

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