Next Capital completed the sale of Discovery Parks to SunSuper in early 2014, approximately three years from the date of the initial investment. The transaction involved all of Discovery’s parks, excluding its Onslow property in WA. Onslow was retained by the existing shareholders, and is being operated under a management agreement with Discovery. The transaction delivered Next Capital a >2.5x multiple of money and IRR of in excess of 38%. Further upside is expected to flow from Onslow.
In December 2010, Next Capital led the recapitalisation of the Discovery business, which was at risk of being placed into receivership at that time. Discovery is one of the largest owners and operators of caravan parks in Australia and was in financial distress as a result of an aggressive acquisition strategy that was heavily reliant on bank debt. Following recapitalisation Next Capital acquired a circa 40% interest in the company, making it the largest individual shareholding in the business.
The investment was predicated on the assumption that the business was fundamentally strong, but was over leveraged, and that there were opportunities to grow the company via improving operating efficiency, the acquisition of new parks and the further development of the existing portfolio.
Post-recapitalisation, a strategic review of the business and its assets was undertaken. This review established a documented framework detailing growth objectives and specific hurdle rates for acquisitions, developments and divestments, with a view to establishing a higher returning portfolio but with an acceptable risk profile.
During the 3+ years of Next Capital’s ownership, the company delivered on its strategic plan by way of:
- Acquisition of 8 properties at attractive yields for a consideration of approximately $120 million
- Investing approximately $50 million in high returning development expenditure
- Divestment of 8 properties at good valuations for a consideration of in excess of $50 million
These initiatives drove good growth; delivering compound annual EBITDA increases of approximately 50%, with limited incremental equity required while maintaining a balanced approach to risk.
In October 2013, SunSuper, an existing shareholder in Discovery, pre-emptively approached the board with a proposal to acquire the residual 70% shareholding.
The Onslow property was retained by the existing institutional shareholders, including management, and is operated under an agreement with Discovery.
Onslow was the most significant “workforce” camp in the Discovery portfolio, with over 450 beds available for occupancy, in an area undergoing significant development, due to the close proximity of the Chevron owned Wheatstone LNG project.
At the time the Discovery portfolio was sold the majority of the Onslow rooms were contracted to Bechtel/Chevron, on a take or pay basis, running through the end of May 2016. The tariffs for these rooms was extremely attractive and provided the support for a loan from Westpac, which facilitated an additional amount for distribution in 2014.
Discussions are currently taking place with Chevron in relation to an extension of their existing contracts. These are yet to be finalised, but due to the decline in gas prices and pricing pressures the tariffs and conditions are likely to be less attractive than the previous arrangements. Once these contract negotiations have been finalised consideration will be given to further dividends from this asset, though the amount and timing is unclear.