UK-based AMEC’s desire to expand its geographical influence and increase its shale gas operations means it has overlooked Foster Wheeler’s poor performance over the last years, offering $3.2bn to acquire the major petrochemicals and energy engineering and construction (E&C) company, analysts said.
Foster Wheeler’s performance on the NASDAQ has been rather an agony since 2008. Its shares peaked on 7 December 2007 at $82.74, falling to a low of $12.88 on 2 March 2009 in the midst of the financial crisis.
The price recovered over the following years and, on the back of speculation about the possible acquisition by AMEC, Foster Wheeler’s shares steadily went up in the second half of 2013 and in 2014 to around $30.
Under the proposed terms of the deal announced on 13 January, Foster Wheeler’s shareholders would own about 23% of the combined company and will have two non-executive representations in AMEC’s board of directors.
“I think this deal is all about geographic expansion as AMEC will gain market share in regions where they have a limited presence,” said an equity analyst in London.
The UK company is looking to reinforce its presence especially in South America, the Middle East and Australia, a country which is projected to be the the largest exporter of liquefied natural gas (LNG) by 2035, according to UK’s oil and gas major BP in its BP Energy Outlook 2035 published in January 2014.
AMEC contributed to the design, construction and commissioning of the SECCO project Copyright: Alamy
Foster Wheeler is notably diversified with about 30% of the company’s revenue in 2013 coming from North America, 25% in the Asia-Pacific region, 24% in Europe, 10% in the Middle East, 9% in South America and 2% in Africa, according to credit rating agency Moody’s.
AMEC contributed to the design, construction and commissioning of the SECCO project
Foster Wheeler has struggled with the front-end engineering design (FEED) for a liquefied natural gas (LNG) project in the Pluto gas fields in western Australia, completion of which was expected in 2010. The project, a joint venture with WorleyParsons, suffered delays due to design and weather related issues and finally delivered its first cargo in May 2012.
“Despite the problems Foster Wheeler has had in the Pluto gas fields project, whether AMEC can convince customers it can deliver in Australia this could be a big area of new business in the coming years,” said the London-based equity analyst.
Cost savings of around $75m have been highlighted by AMEC as one of the most appealing points of the deal. The company’s CEO, Samir Brikho, did not want to specify exact locations or departments where the savings could come from.
“It’s the obvious things around our duplication, corporate overhead, sales and general administration costs, perhaps some central functions, some procurement activity, that type of thing,” said Brikho in an investors call on 13 January.
Foster Wheeler’s operational headquarters are based in Reading, UK, and some analysts have indicated redundancies could take place in the country given potential staff duplications after the merger. A spokesperson for AMEC, however, assures it is too early to say but leaves the door open for such redundancies.
The spokesman said: “[AMEC’s CFO] Ian McHoul said that some of the $75m savings will come from headcount reductions, and combining back office functions or joint servicing areas where clearly we don’t need two sets of people doing the same jobs. But it’s too early to talk locations or numbers.”
Scott Lamb, Foster Wheeler’s vice-president, investor relations, went along the same lines and said no talk about redundancies could have possibly taken place yet, given that the merger has not even been sealed.
On the other hand, the London-based analyst said the $75m figure seems “relatively high” and wonders where savings will come from, but was confident no Foster Wheeler workers in the UK will be affected. “I’d be surprised if we saw redundancies in the UK because the engineers here are quite busy, so I am confident they will be okay,” he added.
After AMEC’s offer was announced, Moody’s issued a note stating the operation was likely to be credit negative as the transaction will be financed mostly by debt, although it added both companies’ have low debt balances and strong credit profiles.
AMEC had, as of 30 June 2013, £56m in operating cash flow, earnings before interest, taxes, depreciation, and amortisation (EBITDA) stood at £158m and revenue at £1.99bn.
“There is clearly a strategic sense to this deal. AMEC is more exposed to the upstream sector and this deal will give it downstream exposure as well as increased diversification in the oil and gas business,” said Michael Corelli, New York-based vice-president, senior analyst, at Moody’s.
“Nonetheless, we view the potential acquisition as credit negative because both companies currently have little debt, especially Foster Wheeler, which has an investment grade rating of Baa3. Now a material amount of debt will be added to their balance sheets,” said Corelli.
“However, the prospects for Foster’s Engineering & Construction group business are quite bright, driven by the expectation for increased downstream activities in the coming years,” he added.
A ‘NEW’ PLAYER
How the sector in which both AMEC and Foster Wheeler operate will be affected remains to be seen, but according to the London-based equity markets analyst the resulting merged company will not be a Tier 1 player – “It won’t become a CBI or a Jacobs” – although its considerable size and geographical expansion will help it gain market share.
“Some companies will be impacted by this deal in terms of a new player in the sector. AMEC is a good engineer and it will be now present in markets in which it has been absent so far resulting in increasing competition, for instance in the Middle East,” he said.
“Foster Wheeler has struggled over the last few years, and it’s possible that the distraction around its asbestos liability or the problems at the LNG project in Australia affected their performance,” said the London-based equity analyst.
As a result of extensive asbestos use in the past, thousands of injured Foster Wheeler workers have taken the company to court, according to US-based Mesothelioma Center, which assists patients with asbestos-related illnesses.
Foster Wheeler had paid an estimated $700m toward 300,000 asbestos claims by 2006. Around 165,000 were still pending by the same year and thousands more have been filed since, according the Mesothelioma Center.