Investors in the hard-hit oil services arena got a boost today as a bid by John Wood Group PLC (LON:WG.) for FTSE 250-listed peer Amec Foster Wheeler PLC (LON:AMFW) breathed some life into a sector battered by industry cutbacks engendered by low crude prices, with the consolidation sees as "logical".
The all-share tie-up, which will bring cost savings of around £110m a year, will create a global leader in project, engineering and technical services across a range of industrial sectors.
The deal values struggling AMFW at £2.25bn, with the combined group set to have a market value of around £5bn.
Mike van Dulken, head of research at Accendo Markets, commented: “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 rekindles bullishness in WG as the industry in which both operate adjusts to a new normal of oil prices around the US$50/barrel mark.”
He added: “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 £500mln rights issue to bolster a debt-laden balance sheet and dividend suspension.”
The commentator noted: “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
Van Dulken added: “Today’s deal signals logical consolidation as those that operate in and around the Energy sector exit the toughest of times and aim to enter the new era of lower prices on a stronger footing, able to better weather any future storms.”
AMFW shares continued to top the FTSE 250 leader board in late morning trading, up over 14.5%, or 71.8p at 561.0p, while Wood Group shares were up almost 4.5%, or 33.5p at 785.5p.
Prescient move …
Even before the AMFW deal, Morgan Stanley today upgraded its rating for Wood Group shares to ‘overweight’ from ‘equal-weight’ with a price target of 1,000p.
The US bank’s analysts said the “re-upgrade” of Wood Group came “after weakness due to FY16 results” which were published on February 21
In a note to clients, they said: “Our price target and earnings estimates are unchanged, but we consider the lower entry point/ valuation attractive, given the 35% upside we see once again.”
The analysts added: “We believe that typically cautious management comments at FY16 results were interpreted too literally and the outlook taken more negatively than in previous years because the sector paradigm has changed.”