Amec Foster Wheeler surges on Wood Group deal

Shares in Amec Foster Wheeler surged on Monday as it agreed the terms of an all-share offer from oilfield services company Wood Group that values the engineer at around £2.2bn.

Under the terms of the deal, Amec shareholders will receive 0.75 new Wood Group shares for each of their shares.

This represents a value of around 564p per Amec share and a premium of around 15.3% to the closing price of Amec's shares on Friday.

Amec shareholders will own around 44% of the share capital of the combined group and the merger is expected to be earnings-accretive on an adjusted earnings per share basis for both Wood Group and Amec in the first full year following completion and significantly accretive once full run rate synergies are achieved.

It is expected that the combined group will be able to achieve sustainable cost synergies of at least £110m.

Wood Group chairman Ian Marchant said: "The combination represents a transformational transaction for Wood Group, which accelerates our strategy and creates a global leader in project, engineering and technical services delivery across a range of industrial sectors. The combination extends the scale and scope of our services, deepens our existing customer relationships, facilitates further development of our technology-enabled solutions and broadens our end market, geographic and customer exposure.

"The combination will create an asset-light, largely reimbursable business of greater scale and enhanced capability, diversified across the oil & gas, chemicals, renewables, environment & infrastructure and mining segments."

Also on Monday, Amec released a full-year trading update for 2016, which it said was broadly in line with market expectations.

Revenue was down 8% on a like-for-like basis to £5.4bn, as a strong performance in solar and E&I was offset by ongoing weakness in the oil and gas market.

Meanwhile, trading profit fell to £318m from £374m in 2015. The company said significant progress on its £100m overhead cost reduction programme in the fourth quarter was offset by the challenging oil and gas market and the impact of cost over-runs on a fixed price US government contract in the Pacific in the E&I segment.

The order book at the end of December stood at £5.8bn compared to £6.2bn at the half year and Amec said that the since the year-end, it has seen a number of contract wins which have not been fully recorded in the order book, giving it confidence in the outlook.

Amec said that in light of the offer from Wood Group, it had decided to suspend plans for a rights issue of around £500m that had been scheduled for 21 March, In addition, it no longer plans to release its 2016 results and hold an investor event on that day.

Mike van Dulken, head of research at Accendo Markets, said the deal offsets a poor, albeit in line, set of 2016 results.

"The deal appears beneficial for both sets of shareholders - hence a positive reaction by both share prices - providing a life-line for a struggling AMFW and rekindling bullishness in WG as the industry in which both operate adjusts to a new normal of oil prices around the $50/barrel mark.

"AMFW shareholders are cheered by a 15% premium that values their shares at levels last seen in mid-to-late October. This was when panic set in about a now avoidable £500m rights issue to bolster a debt-laden balance sheet and dividend suspension. It also provides them with a decent 44% stake in the new group. Income seekers may be left wanting for yield until the deal completes, however, they will at least regain access to dividends in the new group, even if the yield isn’t quite so attractive."

Societe Generale said the deal is a further step in Wood Group’s strategy of creating a global leader in project, engineering and technical services delivery.

It added that "greater scale is the big prize", with the new company expected to generate $12.3bn in revenues.

"With this acquisition Wood 1) is doubling its oil & gas businesses; 2) becomes a significant player in offshore (while still lacking technologies); and 3) acquires AMFW’s power, environment, infrastructure and mining assets."

Meanwhile, Morgan Stanley said stated annual synergies of £110m equate to about 1.4% of combined 2016 costs, "which appears low to us".

At 1550 GMT, Amec shares were up 12% to 549p, while Wood shares were up 1.9% to 766p.