• enerflex ltd. (TSX: EFX) and Exterran Corporation (NYSE: EXTN) announced a business combination to create a leading integrated global provider of energy infrastructure. These are the details.

enerflex ltd. (TSX: EFX) and Exterran Corporation (NYSE: EXTN) announced a business combination to create a leading integrated global provider of energy infrastructure. The company will operate as Enerflex Ltd. and will remain based in Calgary, Alberta, Canada.

Through greater scale and efficiencies, the agreement will strengthen Enerflex’s ability to serve customers in key natural gas, water and energy transition markets, while enhancing value shareholder value through sustainable improvements in profitability and cash flow generation.

The companies will combine in an all-stock transaction under which Enerflex will acquire all of the outstanding common shares of Exterran on the basis of 1.021 common shares of Enerflex for each outstanding common share of Exterran, resulting in approximately 124 million shares of Enerflex common stock outstanding at closing, representing an implied combined enterprise value of approximately US$1.5 billion. The value of the transaction for Exterran is approximately US$735 million, representing an 18% premium to Exterran’s enterprise value as of January 21, 2022.

The transaction value paid for Exterran implies Adjusted EBITDA EV/2022E of 3.6x and Price/2022E cash flow of 1.9x, including synergies, respectively. And upon closing of the transaction, Enerflex and Exterran shareholders will own approximately 72.5% and 27.5%, respectively, of the total outstanding common shares of Enerflex. Enerflex will continue to trade on the Toronto Stock Exchange (TSX) and intends to apply to the New York Stock Exchange (NYSE) or the NASDAQ Stock Exchange (NASDAQ) for listing of Enerflex common stock to be effective at the closing of the transaction.

Strategic Rationale

Creates a world’s leading integrated energy infrastructure provider:

— Highly complementary product lines, geographies and asset bases provide scale, efficiencies and expanded offerings for customers.

— Pro forma geographic exposure will be well balanced with approximately 25-35% of revenues coming from North America, the Middle East and Latin America.

— Accelerates the gross margin growth of recurring segments:

— The combination significantly accelerates the generation of predictable and recurring gross margin from energy infrastructure and aftermarket service platforms.

— More than 70% of the combined entity’s gross margin will come from recurring sources, strengthening its margin profile and reducing cyclicality.

Improved operational efficiency:

— Expect to realize at least US$40 million in annual synergies within 12-18 months of closing through overhead savings and operational efficiencies.

Accretive for shareholders:

— Expected to approximately double adjusted EBITDA and be more than 50% accretive to cash flow per share and approximately 50% to earnings per share (subject to purchase price allocation to be determined at closing) , for Enerflex shareholders.

— Improved scale with 2023E pro forma adjusted EBITDA of US$360-400 million, including synergies.

— Significant excess free cash flow from 2023 that supports debt reduction, shareholder returns and continued growth.

— After closing, Enerflex expects to maintain its quarterly dividend of C$0.025 per common share.

The transaction benefits from a stable long-term capital structure:

— The combined entity will benefit from a capital structure offering abundant liquidity.

As part of the agreement, Enerflex has entered into a binding agreement with Royal Bank of Canada to provide Enerflex with fully committed financing consisting of a US$600 million 3-year revolving credit facility and a – relay of 925 million US dollars over 5 years. And the bridge loan will provide funding to support a planned issuance of new debt before the transaction closes. Funding committed is sufficient to fully repay existing Enerflex and Exterran notes and revolving credit facilities and support the establishment of a new capital structure, cover capital expenditures and other capital requirements in the normal course of business and provide significant liquidity for pro forma activities.

The new revolving credit facility will be subject to a total bank-adjusted net debt to EBITDA of 4.5x, which will increase to 4.0x by the fourth quarter of 2023. And Enerflex is targeting a net debt to bank-adjusted EBITDA of 2.5x – 3.0x within 12 to 18 months of closing.

Following capital project commitments in 2022, the combined entity’s capital allocation from 2023 will prioritize: (i) balance sheet strength; (ii) sustainable returns for shareholders; and (iii) disciplined growth focused on full-cycle earnings.

Commitment to sustainability:

— Aligns strong cultures emphasizing the health and safety of our global workforce and corporate citizenship.

— Global coverage enhances ability to deliver sustainable solutions for natural gas, water and energy transition, including carbon use and sequestration, biofuels (including renewable natural gas), reuse and recycling of produced water and electrification.

KEY QUOTES:

“This is an exciting day in the history of our companies. The Operation is immediately accretive for the shareholders; enhance our presence, offerings and scale in our regions; and most importantly, executing our multi-year strategic goal of increasing recurring revenue to improve the profitability and resilience of our platform. Enerflex and Exterran each have a long history of global expertise in providing modular energy solutions. Together, we are more efficient and better positioned in global financial markets. The transaction will enhance our ability to partner with a broader set of customers to solve their growing energy infrastructure challenges with integrity, creativity, commitment and success.

— Marc Rossiter, President and CEO of Enerflex

“We are delighted to be able to create shareholder value through this transaction and to enhance our product and service offering. The scale and efficiency this combination brings is the right path for Exterran and offers significant opportunities for accelerated growth in produced water treatment and energy transition products and services.

— Andrew Way, President and CEO of Exterran