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Wood Group throws Amec a £2.2bn life raft

Wood Group throws Amec a £2.2bn life raft

All offshore oil services groups have had a tough time adjusting to lower energy prices, and none more so than Amec Foster Wheeler (AMFW). Swamped by debt, hamstrung by operational overreach and hammered by the lower margins and thinner project pipelines offered by its clients, the London-listed company was in dire need of fresh cash. An asset disposal programme was set to claw back £246m by the middle of this year, but it was not going to be enough. Many investors were anticipating a rights issue, the hint of which in a trading statement last October wiped more than a fifth from the company's share price.

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 Wood Group (WG.) on Monday. The recommended offer values the target at £2.2bn or 564p a share - a 15 per cent premium to Amec's listing price. For every share they own, Amec investors will be given three-quarters of a new share in the combined group.

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

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By Alex Newman,
16 March 2017

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