Shares in Amec Foster Wheeler PLC (LON:AMFW) beat a retreat this morning having shot higher yesterday on the back of John Wood Group PLC’s (LON:WG.) £2.2bn agreed bid for the engineering contractor, with Citigroup downgrading its rating to ‘neutral’.
In early trading, AMFW shares on the FTSE 250 index were down 1%, or 5.5p at 540.5p, having leapt 12% higher yesterday.
In a note to clients, Citi’s analysts said it was cutting its stance on AMFW from ‘buy’ due to the limited upside potential to its target price and as they think the likelihood of a rival offer is low.
The analysts said: “We see this as a largely defensive deal given what remains a challenging environment for oil and gas activity.
“We also believe WG sees the opportunity to simplify AMFW’s organisation, cut costs and position the business to benefit from a recovery in its key end-markets”.
They added: “WG has identified cost synergies of at least £110m per annum going forwards (c.18% of the combined group’s 2016 EBITA), aided by the overlap of operations in the UK North Sea.
“The business overlap and WG’s track record on cost saving delivery suggests the chance of a rival offer is low, in our view.”
Wood drifts …
Wood Group shares also drifted lower in early trading after adding over 4% yesterday, losing 1.8% or 13.5p at 749p.
However, broker comment on its move for AMFW was mostly upbeat, with Macquarie raising its target price for Wood Group to 810p from 700p while retaining a ‘neutral’ stance on the stock.
Macquarie analyst David Farrell said the deal made financial if not strategic sense.
In a note to clients, he said: “On financial metrics the deal adds up if investors look out to 2020.
“Unfortunately for us, however, end market diversification (a theme we currently like) seems to be more an outcome of the deal rather than a primary driver.”
However, analysts at Societe Generale said the “combination makes a lot of strategic sense to us as it partly solves AMFW and Wood Group’s current general lack of critical mass, and most notably in four sub-segments: offshore project management, top sides, subsea engineering and offshore pipeline.”
They added: “With this merger the new Wood Group will also become the clear leader in MMO (Marine Management) operations in the North Sea with a c.50-60% market share.”