Locke’s £120m stock … and lots of barrels

By Ian Fraser

Sunday Herald

January 20th, 2008

Alasdair Locke, executive chairman, Abbot GroupCONVENTIONAL wisdom has it that the credit crunch has made big private-equity buyouts a thing of the past. However, Alasdair Locke, the 54-year-old executive chairman of Abbot Group, has just proved this wildly wrong.

On December 20, he sold the Aberdeen-based oil services company to US venture capitalists First Reserve. The £909 million deal sees him reap a personal fortune of £120m for his 12.9% stake in the business.

Locke founded Abbot Group in 1990 and built it into the largest owner and operator of oil rigs in the North Sea, also with extensive operations in West Africa, the Middle East and Russia. He decided to sell it when he realised the short-termism of fund managers was incompatible with his vision for the company.

Now that he is no longer required to pay homage to these investors, Locke feels able to speak out about them. “I think that half – if not all – fund managers are half-baked. I wouldn’t have said that a few weeks ago but now I feel I can.”

While he concedes that being a quoted company did help Abbot after it floated in 1995, Locke has become increasingly disillusioned with myopia in the Square Mile – particularly when Abbot’s shares were marked down following its £247m acquisition of Songa Drilling in June 2006.

“They wouldn’t put a proper value on the business and wouldn’t buy into the long-term strategy,” he says. “In our type of business, you have to think at least two or three years ahead. You can’t do it quarter by quarter.

“The right decision for us was to get access to more capital and further expand this business. I knew that if we did that my share price would be marked down, at which point there would have been a real danger that one of my competitors would snap us up.”

The son of a Scots-born brigadier, Locke is a well-spoken Banffshire landowner who was by no means predisposed to becoming an entrepreneur. He was educated at Uppingham, a private school in Rutland, and read history and economics at Wadham College, Oxford, where he also got involved in drama, with such contemporaries as Mel Smith and wine writer Oz Clark (Locke specialised in production rather than acting).

Locke’s first job on graduating was as an investment banker at Citigroup, which he joined in 1974 on a salary of £2000 a year. He says: “I did not have a burning ambition to be a merchant banker; it just seemed more interesting than fund management or insurance underwriting.”

One thing that Locke learnt at Citigroup was that he was interested in the shipping and oil industries. In the end, though, it also turned out to be a lesson in the crassness of American bosses, when a new broom came in from the other side of the Atlantic in 1978 and fired Locke and most of his colleagues, not for incompetence but just in the name of change.

This led him to join Ocean Finance Corporation, which specialised in providing finance for the merchant marine. A few years later, he founded his own Singapore-based advisory boutique for shipping finance, which he later sold to investment bank Henry Ansbacher. This gave Locke the seed funding he would later use to set up Abbot.

After a brief spell running Ansbacher’s international operations from London – a job he didn’t terribly enjoy – Locke went into business with the French oil tycoon, vineyard owner and polo player Hubert Perrodo. The Frenchman already had an oil services contracting business based in the Far East, which he was keen to expand, leading to the formation of the company that was latterly called Celtic Energy.

However, Locke and Perrodo, who died in a mountaineering accident in the Alps in 2006, had different visions about how to take the business forward and there was a parting of the ways. Locke insists it was entirely amicable. It was also the catalyst that drove him to found Abbot in 1990.

“It was the services side of the oil business that interested me, and I particularly wanted to get into the rig-owning side. I realised that you could build a reasonable-sized oil-drilling contracting business – a service business – without having to take speculative commodity risk from activities such as drilling.”

Locke seems to have had a peculiar knack for anticipating the needs of oil majors such Exxon Mobil BP and Shell, as well as ensuring that Abbot was able to deliver a more comprehensive and technologically advanced package to such players. His training in investment banking probably helped here. It meant when it came to raising the $8m to $30m (£4m to £15m) required to finance each new rig, he knew which sources to tap.

His timing was also good. Most of these large oil companies at that time were in financial difficulties, partly because of the recession but also because the oil price was languishing at $20 to $25 a barrel. According to Locke, this combination of circumstances meant they were keen to outsource parts of their business, including the ownership and management of production rigs.

Locke’s biggest break came in 1992, when he bought the North Sea drilling company KCA for £11m. “I’d followed the company for years and I always thought it was operationally very good. It was just that its owners were hopeless. At that time, it was bust and headed straight down the tubes.”

Locke managed to turn the business around in double-quick time. He had anticipated being able to make cost savings of £1m to £1.5m a year, but in the end he doubled that to £2m to £3m a year.

“We also found a few more assets we didn’t need, and we also removed the debt after a year. Then we took the business private and reversed it into a cash shell in 1995,” he says, making the whole process of reversing the whole business into an existing inactive plc and renaming it Abbot sound remarkably easy.

With Abbot a listed entity, the “half-baked” fund managers of the City initially bought into Locke’s story. “Having turned the business around, it had started to grow organically quite strongly and had also started to make some quite interesting profits,” he says.

Through a mixture of more organic growth and acquisitions of rival drilling players, fuelled by the surplus cash from the reverse listing, Abbot became the dominant player in the North Sea market. Using this as a platform, Locke then set about conquering the world. “If you’re good at oil services and drilling there you can do it anywhere in the world – and this is a global business. It can’t be a parochial business,” he says.

The next major deal was the £134m acquisition of German drilling company Deutag in 2001. This had the advantage of giving Abbot a presence in some of the world’s further-flung oil-producing regions.

Today Abbot has more than 60-plus land rigs, three offshore rigs and manages a further 12 offshore rigs. It also has 38 platform contracts in different parts of the world. The business, which employs 7,000 people worldwide, is active in some of the world’s most dangerous environments, including Siberia, the Middle East and West Africa.

But by last year, having had enough of the City, Locke took the decision to orchestrate an auction for the business between several private equity houses, including not only First Reserve but CVC and Candover too, and extracted commitments from each to keep Abbot intact as well as to invest £500m to £1 billion in the next phase of its development. “The whole thesis of selling was not about asset stripping. In the end, First Reserve came up with the highest price but they will also be an excellent owner of the business.”

He says he has no regrets about adding to the list of former Scottish plcs, particularly since he believes it entirely possible that First Reserve will return the company to the stock market in about 2012. Nor does he have any fears about dealing with private-equity owners. “They’re committed, they’re interested, and they’re involved. They’ll give you direct and immediate feedback, you have to perform, but that’s fair enough.”

With the deal agreed and a gross sum of £120m in his back pocket, Locke admits that retiring from the business did cross his mind. However. Bill MacAulay, the boss of Greenwich-based First Reserve, who has been described by Forbes magazine as the “Connecticut oil baron”, persuaded him to stay on at least until First Reserve makes its exit. “They wanted me to stay on and I don’t mind doing that. You’ve got to do something; you can’t do nothing.”

Locke says he will be happy to remain as chairman for as long as it takes. However, rather than work five days a week he will probably be winding down to fewer days towards the end of First Reserve’s five-year ownership. “We’ve got some younger people coming through and some of us older farts will be moved into more strategic mentoring roles and the younger ones will come on.”

Unusually for somebody who has devoted most of their life to the oil business, Locke is also an organic farmer. He has 500 head of short-horn cows and 2000 organically farmed blackface ewes on his 2700-acre estate, Glenrinnes Farms, near Dufftown. He also has a wife (his second) and a combined total of seven children between the ages of 10 and 26 back at the ranch.

He is also a strong believer in both renewable and nuclear energy. “It doesn’t matter if you believe in climate change or global warming; I actually believe we have to go down the route of renewable energy because we haven’t got enough oil and gas.”

Asked what he’ll be doing with that £120m, Locke says: “I’ve got a little bit of tax to pay and I will reinvest some in Abbot – some will be managed by others and I’ve got some other business interests.”

These include David Montgomery’s Mecom, of which he is a board member with a significant stakeholding, having known Montgomery through charity connections for a number of years.

“There are also certain charities I support.”

He says his biggest motivator is not the money, but the idea of building something enduring. “A company like this is a huge wealth creator, because it employs a lot of people on high salaries, who are all paying tax, so it’s good for the local and national economies. It’s satisfying to have done that; if more people did that, Scotland would be a quite different place.

“I set out to build something and – amazingly – it seems to have worked,” he smiles.

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