Siemens Forms $1 Billion Tie-Up to Boost Gas Services

Siemens AG, Europe’s largest engineering company, formed a $1 billion joint venture with John Wood Group Plc to expand gas-turbine service offerings in the U.S. as both companies aim to boost profitability.

Aberdeen, Scotland-based Wood Group will have a 51 percent stake in the venture, which comprises its maintenance and power solutions businesses and Siemens’s TurboCare gas- and steam-turbine design, repair and manufacturing unit, it said in a statement today.

“The businesses going into the joint venture have historically not performed as well,” Wood Group Chief Financial Officer Alan Semple said on a conference call. “Siemens has also been taking a number of steps to improve margin potential. We do believe that the Siemens business will have a higher margin potential, reflecting more original equipment manufacturer involvement.”

Siemens, which in August replaced CEO Peter Loescher with finance chief Joe Kaeser after a series of missed profit goals, has been seeking to expand its offerings in the oil and gas segments. Loescher told Bloomberg in May that the Munich-based company was looking to make bolt-on acquisitions in the sector. Siemens has been evaluating a bid for turbine and compressor maker Dresser-Rand Group Inc. for as much as two years, people familiar with the situation told Bloomberg the same month.

Cost Savings

The relevant units of Siemens and Wood Group have combined assets of $1 billion, of which $428 million comes from Siemens, and some 4,500 employees. The Wood Group division had pretax profit of $16.5 million in 2012, while Siemens TurboCare reported profit on that basis of $20.8 million.

Of the 2,700 Wood Group employees set to join the venture, some 2,000 are based in the U.S., strengthening Siemens’s offering there. Siemens’s TurboCare unit has 500 employees in the U.S. and some 880 in Poland.

Synergies at the new division will generate $15 million in annual savings for Wood Group within three years, with the first savings taking effect in 2015, the company said.

Wood Group shares jumped as much as 1.7 percent to 775 pence and were trading 1.1 percent higher as of 9:34 a.m. in London, valuing the company at 2.9 billion pounds ($4.6 billion). Siemens fell as much as 0.6 percent and was trading down 0.3 percent at 89.20 euros in Frankfurt.

The deal, which the companies predict to be completed in the first quarter of 2014, includes a $70 million payment to the Wood Group by the joint venture for its 49 percent stake in Wood Group Pratt and Whitney, the turbine spare parts and technical support provider.

(Updates with share price in eight paragraph.)
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