Is big better? Oil services provider Wood Group certainly thought so when it pounced on Amec Foster Wheeler, a £2.2bn takeover that completed last week.
The all-share deal was an opportunistic one, struck in March when the engineer was at a low ebb and about to do a £500m rights issue to patch up its balance sheet. It had long been on the cards, but until a few years ago, you would have bet that Amec would be the acquirer.
Wood wanted to reduce its reliance on the oil and gas sector, where low prices have slashed margins. By buying Amec, Wood would be able to branch out into other areas of engineering, such as nuclear, where it otherwise faced a long slog to achieve scale.
There was precedent: General Electric’s merger of its oil and gas business with Baker Hughes, and Schlumberger buying Cameron International.
Then the competition watchdog weighed in. Wood was forced to sell Amec’s North Sea operations, where otherwise the combined group would have had a market share of more than 60%. While Wood insists it always expected disposals, chief executive Robin Watson clearly didn’t anticipate having to sell more than £700m of revenues and shed 4,000-plus staff.
“It [the North Sea] is a significantly smaller market,” was his initial response when asked about competition worries. “Regulators need to ask whether there is room for four top-tier contractors in the North Sea.”
Evidently they did. Those lost revenues matter. The buyer, Australia’s Worley Parsons, is now a rival on Wood’s home turf. The disposal has already forced Watson to pare back his target on cost savings from the deal to $170m (£128m). Analysts at Jefferies reckon the lost staff, plus the weak market and fewer acquisitions, make this cost saving target a tough ask.
They see echoes of Amec’s ill-fated Foster Wheeler deal, and worry what it means for Wood’s dividend. “A deal to take away the pain may just transfer the pain,” they warned. Then there’s £1bn of debt that comes with Amec — although asset sales will help.
Other clouds are gathering too, such as a Serious Fraud Office probe into Amec, and an internal investigation at Wood — both involving their dealings with Unaoil, a Monaco energy consultancy.
Little wonder shares in the company have struggled since the deal was announced (although they have rebounded in recent weeks).
At 717p, that puts Wood in touching distance of a coveted FTSE 100 spot. That might be as good as it gets. Avoid.
