Published in Oil Industry News on Monday, 13 March 2017 Graphic for News Item:
Wood Group Merger – Job Losses Inevitable, Aberdeen HQ to Stay Chief Executive of Wood Group Robin Watson, has announced that he will remain committed to the Granite City after a merger with Amec Foster Wheel was announced throwing thousands of jobs into question. The two organisations employ 64,000 people between them, and the merger will see many positions having more staff than necessary, resulting in inevitable job losses and redundancies. According to reports from an inside source, Wood Group took only 8 days to agree the £2.2 Billion takeover of it’s rival Amec Foster Wheeler.
For Amec, the offer could not have been better timed as huge debts take their toll on the day to day running of the organisation. The all-share deal was announced on Monday, just over a week before Amec planned to suspend dividend payments and ask shareholders for £500m via a rights issue to ensure it had sufficient headroom to avoid a breach of its debt covenants with lenders.
The takeover is the latest in a string of oilfield services deals at a time when the sector has been under strong pressure. After crude prices plunged in 2014, its customers — oil and gas producers — slashed their spending. General Electric, a leading US company in the industry, last year agreed to combine its oil and gas business with Baker Hughes, a domestic rival, and Schlumberger, another big sector player, acquired energy equipment manufacturer Cameron International. But Wood Group’s swoop on Amec is particularly opportunistic, as the latter was struggling with more than £1bn of net debt — a painful hangover from an ill-timed $3.3bn takeover of US rival Foster Wheeler in 2014. The oil price slide hit at just the wrong time, as the enlarged company was focused on integration. “When they did the Foster Wheeler takeover, they focused on the deal synergies and did not capitalise on falling sector costs and margin pressure as a result of the oil and gas downturn,” says Victoria McCulloch, analyst at RBC Capital Markets. Annual revenue at Amec’s oil and gas business, its largest division, has dropped almost 31 per cent between 2014 and 2016, to £2.3bn. Meanwhile, by the end of December, Amec’s ratio of net debt to adjusted annual earnings was 3.3 times, and the company was heading towards a covenant test on its borrowing facilities on June 30. Amec last summer parachuted in a new chief executive, Jonathan Lewis, previously a senior manager with Halliburton, to help turn round its fortunes.
Mr Lewis has been swift to cut costs — including laying off 650 middle managers in the fourth quarter of last year — and was working towards a target of raising £500m of disposals by June. John Connolly, Amec’s chairman, was keen to stress on Monday that the company had made “significant progress” since Mr Lewis’s arrival and the board had been preparing to stand behind the rights issue and other steps necessary to survive as an independent company. But analysts say the Wood Group bid has provided Amec with a get out of jail free card. Shares in Amec jumped 20 per cent in early trading on Monday and closed up 11 per cent as investors relished the prospect of an offer with a premium, rather than a rights issue. In spite of Amec’s recent woes, Wood Group insisted it was buying a company with a “tremendous” reputation and, crucially, exposure to other sectors that are growing and less volatile than oil and gas. Amec is working on the proposed third runway for London’s Heathrow airport and consulting on proposed carbon capture and storage projects. Although oil and gas still account for the biggest share of Amec’s revenue, sales at its power and process division — which provides services for companies generating electricity from conventional and renewable energy sources — have increased nearly 49 per cent since 2014 to slightly less than £1.5bn at the end of 2016. The combined business will generate 60 per cent of its revenues from the oil and gas industry, compared with 85 per cent at Wood Group currently.
Wood Group also sought to play down debt concerns. The enlarged group will have pro-forma net debt of $1.6bn, meaning it amounts to 1.9 times annual earnings, before expected synergies of what the companies said were “at least” £110m a year. That debt ratio is expected to reduce to between 0.5 and 1.5 times 18 months after completion of the deal, Wood Group said. One Wood Group shareholder, Investec, said it favoured the deal. “We like it for three reasons: it is well timed, it diversifies Wood’s business, which in the long run is a good thing, and it appears to us to be accretive,” said Tom Nelson, Investec’s head of commodities resources.
The deal will need approval from competition watchdogs in six countries, including the UK, where there is significant concern among rivals about the market power of a combined Wood Group and Amec in the North Sea. In the worst-case scenario, Wood Group would have to sell off businesses in the North Sea to gain approval, one person close to the deal said. But Robin Watson, chief executive of Wood Group, suggested that even with a smaller North Sea business the acquisition would pay off. “We are confident that the merits of the overall deal are not compromised by the North Sea situation,” he said.
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