All offshore oil services groups have had a tough time adjusting to lower energy prices, and none more so than
In the event, Amec was days away from going cap in hand to investors for £500m when it received an all-share takeover offer from rival
For Wood Group, buying Amec gives it an opportunity to lower its dependence on oil and gas work and diversify further into chemicals and power. Analysts at Macquarie Research argue that this move, which also gives Wood entirely new positions in environmental, infrastructure and mining work, "seems to be more an outcome of the deal rather than a primary driver".
Financially, there is some logic. Pre-tax cost synergies are estimated to be worth at least £110m ($134m), and the combined group believes it can reduce net debt to between 0.5 and 1.5 times cash profits within 18 months after the merger completes.
Beyond that, investors in both companies have cause for optimism in the order book. Prior to the deal's confirmation, Amec announced a flurry of new contracts. These included agreements with Royal Dutch Shell's consulting arm and to rejuvenate its assets in Brunei, refinery contracts with Eni and Kuwait's state oil group, and a long-term support arrangement with EDF Energy's nuclear division.
It's likely that Amec shareholders will be miffed by the slight takeover premium, but the all-stock nature of the transaction means they retain exposure to a geographically-diversified group with a progressive dividend policy. At the end of 2016, Amec's net debt of £1bn stood at 3.3 times adjusted cash profits; a particularly high ratio considering combined pension and asbestos related liabilities stood at £471m. All things considered, we think it's wise to grab the life raft. Accept.
Last IC View: Buy, 451p, 1 Nov 2016