Energy

Chris Hughes is a Bloomberg Gadfly columnist covering deals. He previously worked for Reuters Breakingviews, as well as the Financial Times and the Independent newspaper.

The award for tactical cunning in British M&A goes to John Wood Group Plc. The Scottish oil services group has timed its 2.2 billion pound ($2.7 billion) bid for struggling peer Amec Foster Wheeler Plc almost to perfection. It has pounced at the target's moment of peak vulnerability.

The outlook for Amec is pretty dire. CEO Jonathan Lewis came in last year and disappointed investors in October by failing to unveil a quick-fix strategy review. The shares fell 23 percent. The fact is there are no quick fixes, other than a deal.

Amec was cruising towards a rights issue to cut its excess indebtedness. Investors stumping up in any cash-call would have to wait several years before the group could earn an adequate return on the new funds. In the meantime, they would just feel the pain of earnings dilution.

By contrast, Wood is offering the chance to trade into a combined Wood-Amec at a premium and ride a profit boost from cost-cutting.

The imbalanced negotiating position means the deal pays for itself for Wood. Based on Friday's closing share price, Wood's all-stock offer valued Amec at 564 pence a share, a mere 15 percent premium. True, the premium is 22 percent versus Amec's average level since January. But either way it's still a low top-up on a bombed-out share price depressed by the expectation of new stock issuance.

Meet In The Middle
John Wood's offer for Amec undoes recent share price history for the target
Source: Bloomberg

Had Wood waited, Amec might have got the rights issue away and perhaps been able to cobble together a recovery plan backed by new investors. Tough, but not impossible.  Amec might then have felt like it could trumpet a credible standalone alternative. 

The financial terms somewhat mitigate the risks Wood is assuming by swallowing a business bigger by revenue, leverage and headcount -- and with asbestos claims on the balance sheet. Wood has identified pretax savings worth 110 million pounds annually. These are worth about 770 million pounds on a present-value basis. This is probably conservative.

Wood shareholders get 56 percent share of the combined entity so they share in 430 million pounds of these financial gains. Deduct the premium, worth 290 million pounds, and that's 140 million pounds of uplift, worth 5 percent on the share price. That was fully priced in at first on Monday, until investors rightly became a little more cautious about the deal delivering given the integration and antitrust risks.

For Amec shareholders, the premium and the value creation are worth about 630 million pounds, a 33 percent top-up from Friday's market value. That's hard for Amec to get to on a standalone basis, but it may not deter rival bidders.

The Scots have got probably the best terms they can get out of Amec. But the target hasn't agreed a break fee if someone else chooses to make a higher offer. A counterbid would be brave. Even so, Wood Group's tactical cunning may still not be enough to close this deal.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
Chris Hughes in London at chughes89@bloomberg.net

To contact the editor responsible for this story:
James Boxell at jboxell@bloomberg.net