AspenTech snaps up KBC for refinery ops

Now this is interesting. AspenTech, which makes software used for the design and costing of chemical processes (think the molecular changes required to turn crude into jet fuel) and for optimizing the overall oil and gas supply chain (think “how much crude do I have, how much jet fuel do I need, where does it have to go? What are the financial ramifications of the options available today?”) is buying KBC Advanced Technology Plc, a UK company that offers consulting services and very specific modeling software to the refinery market. KBC is publicly traded in the UK, so the deal has AspenTech buying shares at 185 pence for a total of £158 million ($230 million, at yesterday’s exchange rate). AspenTech will finance the deal from cash on hand and a credit facility it expects to close in February.

A bit more about KBC: It had revenue of £76 million in 2014, and £36 million for the first half of 2015, up 5% year/year. The purchase price is a 52% premium to yesterday’s closing share price and a revenue multiple of somewhere around 2x.

In 2014, 28% of KBC’s revenue came from sales of its software; the remaining 72% was from consulting projects. Both parts of the business are profitable under UK accounting rules and AspenTech expects the results to be accretive to results under US rules by fiscal 2017. In its report on H1 2015, the company said that it has a strong pipeline of work, up 17% year/year to £74 million, as more refiners sought out profit improvement ideas — both technical and managerial.

AspenTech laid out its reasoning for the acquisition in a call with investors. CEO Antonio Pietri says that KBC will bring world-class consultants that strengthen AspenTech’s ties to refiners; drive awareness of and, it is hoped, adoption of AspenTechs’ solutions by KBC clients; and add refinery-specific software to AspenTech’s broader portfolio. The most interesting reason, however, is that KBC will enable AspenTech to move more quickly into asset optimization — improving operating (OPEX) and capital (CAPEX) efficiency for existing assets.

A couple of other interesting tidbits from the call:

• Mr. Pietri took pains to say that, even though KBC gets more than half of its revenue from consulting, AspenTech “is and will remain a software company — that is our focus, is what drives our growth”. Investors in software companies don’t love large consulting groups (they’re expensive and keeping them at anything approaching 100% utilization is very difficult), so AspenTech’s management will have quite a task balancing the value and cost of the consultants — investors will likely only come fully on board when they see software sales tied to consultant projects
• He sees a huge opportunity to bring European/American-style refinery optimization to global markets, as this isn’t yet institutionalized in other parts of the world. Asset optimization is complex, and ties into design, operations and maintenance; KBC’s reactor models will be a key component of AspenTech’s strategy for refinery operations and maintenance offerings
• There is “not a whole lot” of overlap in software solutions — KBC’s reaction model suite is much more extensive than AspenTech’s, and they are “really complimentary”
• KBC’s “secret sauce” (my term) is combining these reactor models with other simulation capabilities and consulting to put the models into refinery operations — AspenTech is much more focused on modeling and simulation of assets, and has not gotten as far in pushing them into operations.

The merger has to meet UK regulatory approvals but is expected to close this quarter.