British oil and gas engineering firm Amec has agreed to buy Swiss-based rival Foster Wheeler for 1.9 billion pounds ($3.13 billion), the first sizeable acquisition in the sector for three years.
Amec said the deal would increase its position and help more than double revenues in growing markets such as Latin America and the Middle East.
The firm, which provides services and equipment for the oil and gas, mining, nuclear and renewable energy sectors, said the acquisition would also add oil and gas transport and refining capabilities to its existing extraction facilities.
The deal, expected to complete in the second half of this year, will end a drought of major transactions in a sector where targets’ high growth forecasts have fuelled shareholders’ expectations of big takeover premiums, making it difficult for firms to agree on price.
Amec’s 680 million pound approach for British peer Kentz was rejected by Kentz’s board last August, who said the bid undervalued the firm.
Bankers told Reuters in December that the sector’s last sizeable deal was Wood Group’s takeover of PSN for just under $1 billion three years ago.
Larger European contractors, which have amassed large cash reserves thanks to years of rapid growth, are hungry for such acquisitions which they believe would help them to expand into new regions such as Africa and newer specialisms such as liquefied natural gas (LNG) and shale.
Amec expects a 10 percent boost in earnings in the first 12 months after the acquisition, with returns on its investment to exceed the cost of capital in the second year.
It said the deal would also create annual cost savings of at least $75 million.
“The combination of our two businesses, Amec and Foster Wheeler, would be financially and strategically attractive,” Chief Executive Samir Brikho said.
Foster Wheeler provides engineering services and power generator equipment to the LNG, oil and gas and petrochemical sectors. The deal values it at about 10 times enterprise value to earnings, compared to a sector average of 8.1 times, according to Reuters calculations.
CASH AND SHARES
Media reports last year suggested that Foster Wheeler was the target of a bid battle between Amec and oil services group Petrofac. A source close to Petrofac told Reuters at the time that the company was not interested.
Under the Amec offer terms, Foster Wheeler shareholders will receive approximately 0.9 Amec shares and $16 in cash, representing $32 for each Foster Wheeler share.
The Swiss engineer’s shares closed at $28.73 on Nov. 26, the day before the first media reports of Amec’s interest, and its share price has risen 9.7 percent since.
Shares in Foster Wheeler, which are listed on the Nasdaq and have risen by 18 percent over the last three months, closed at $31.46 on Friday.
Foster Wheeler will hold shares in Amec after the deal’s completion representing 23 percent of the enlarged company, and Amec will seek a U.S. listing in connection with the transaction, the companies said.
Canaccord Genuity analyst Alex Brooks said he regarded the proposed deal as poor value for Amec shareholders due to the high value the transaction put on Foster Wheeler’s equity, but that strategically, the two companies were a very attractive combination.
Foster Wheeler said it had agreed with Amec not to solicit alternative proposals up to Feb. 22, and would pay out a one-time dividend of $0.40 per share before closing a deal.
Amec is being advised by Bank of America Merrill Lynch , while Foster Wheeler is being advised by Goldman Sachs and JP Morgan.
Amec said it had performed in line with expectations for 2013 but that less favourable exchange rates for 2014 compared with 2013 would reduce its core earnings by 10 million pounds, year on year. It said it now does not expect to report adjusted earnings per share of more than 100 pence in 2014.
Shares in Amec opened 2.4 percent down at 1057 pence after it unveiled the deal, but recovered to trade 1.76 percent up at 1098 pence at 1244 GMT, against a 0.3 percent fall in the European oil and gas index, valuing the firm at 3.2 billion pounds. ($1=0.6066 British pounds)