After an initial fall, the market is giving a cautious thumbs up to oil services firm Amec's (AMEC) £1.9 billion recommended cash and paper offer for its Swiss peer Foster Wheeler (FWLT:NASDAQ) – the shares ahead 1.2% at £10.91.
The £3.2 billion cap expects the deal to be double-digit earnings enhancing in the first 12 months following completion. Yet it acknowledges this will not be fully realised in 2014 (with the deal expected to complete in the second half) and says it will not hit its long-standing 100p earnings per share (EPS) target this year. The company also notes adverse currency movements are expected to have a negative year-on-year EBITA (earnings before interest, tax and amortisation) impact of £10 million in 2014.
We discussed the possibility of Amec making an acquisition and the 100p EPS target in our look at the wider sector last month and there had been speculation in the media and among analysts about a bid for Foster Wheeler after last August's failed £680 million attempt to capture its UK-listed rival Kentz (KENZ).
The company says the transaction will boost its geographical footprint – more than doubling its revenues in faster-growing regions and add mid and downstream capability to its current upstream focus in oil and gas. It also expects annual cash synergies of $75 million and expects return on invested capital (RoIC) to exceed cost of capital in the second 12-month period after the deal completes.
The outline terms agreed will see Foster Wheeler shareholders receive 0.9 Amec shares and $16 cash (funded from its existing balance sheet and debt) – equivalent to $32 for each Foster Wheeler share. This is a very modest premium to Friday's close of $31.46.
Assuming the deal goes through Foster Wheeler shareholders would hold shares in Amec representing 23% of the enlarged company and Amec expects to seek a US listing in connection with the acquisition. Foster Wheeler has agreed not to solicit alternative proposals until 22 February.
Investec comments: 'The deal will bulk Amec up in its growth regions and boost Amec's downstream presence (it is mainly upstream). But less clear to us is the fate of Foster Wheeler's power generation business – 40% of revenues and which doesn't sit comfortably in the enlarged group.'
Canaccord Genuity believes Amec is over-paying: 'Assuming no change in Amec's share price, the transaction values FWLT equity at 11.5x 14E EV/EBIT (enterprise value to earnings before interest and tax) and 9.6x 14E EV/EBITDA (enterprise value to earnings before interest, tax, depreciation and amortisation), as compared to Amec's own ratings of 7.9x and 7.6x respectively. If we include the $75 million in synergies the rating divergence is less stark – but we nonetheless regard this proposed transaction as poor value.
'Furthermore, the warning for 2014 is disappointing: the language in the release seems to say that Amec can't reach the 100p for 2014E even including the accretion from the FWLT transaction. Our EPS for 14E would be 92p without a buyback,' adds Canaccord.