14 January 2014

Alistair Osborne By Alistair Osborne, Business Editor

Amec, the UK engineer and project management group, has struck a “transformational” £1.9bn deal to buy US-listed rival Foster Wheeler in a move designed to capitalise on new opportunities in the oil and gas markets.
The acquisition, as yet only “provisionally agreed”, marks the denouement of a two-year dalliance with Foster, which is domiciled for tax reasons in Zug, Switzerland, and employs 13,000 people.
Samir Brikho, Amec chief executive, said: “In oil and gas, it will add their midstream and downstream capabilities to our existing upstream ones, bringing with it new customers. This is a transformational combination.”
Amec, which has expanded rapidly in recent years off the back of a strong presence in the North Sea, will add Foster’s prowess in the growing markets of liquefied natural gas (LNG) and shale gas – enabling the enlarged group to provide services across the entire oil and gas chain.
The two sides also make a good geographical fit, with Amec’s North American and European footprint enhanced, Mr Brikho said, by Foster’s strengths in Saudi Arabia, Qatar and Oman in the Gulf, growing businesses in Thailand and India and bigger presence in China, where it has 900 people. That’s on top of Foster’s LNG expertise in Canada and what Mr Brikho called its “shale gas position”.

Amec plans to pay $3.2bn (£1.9bn), split evenly between cash and new shares, with Foster shareholders taking 23pc of the englarged £5bn-plus group.
Annual cost synergies are expected to reach at least $75m, a “good chunk” of which, admitted Amec finance chief Ian McHoul, would “come from a reduction in headcount” – notably from duplicated office jobs.
The UK company’s planned offer of 0.9 new Amec shares for each existing one, plus £968m cash, values Foster at $32 a share – a mere 12.8pc premium to the price in November before the talks leaked.
The premium reflects the fact that Foster’s advisers, Goldman Sachs and JP Morgan, have been running a sale process for the business for several months and initiated the latest discussions with Amec after earlier talks broke down in September.
There was speculation that UK-listed Petrofac, China’s Sinochem and America’s Fluour Corporation all looked at Foster – though the market did not appear to be expecting a rival bid, with Foster shares trading at $31.80, up 34 cents. Petrofac declined to comment but is understood not to be interested in Foster.
Mr Brikho said the deal had its roots in Amec’s decision in April 2007 “to look at all the companies in the world with a good position in oil and gas” and draw up a list of acquisition targets. On-off talks with Foster Wheeler began more than two years ago but invariably broke down on price.
“They came back very recently and we met with them over this weekend to see if we could put together a deal,” Mr Brikho said.
He denied Amec made its move on the rebound from an abortive £700m hostile bid for engineer Kentz, saying: “We have been looking at Foster Wheeler for years. We are not interested in doing deals for the sake of doing deals.”
In a statement Foster said it had provisionally agreed the Amec deal “following a comprehensive review of strategic alternatives”.
Chris Kinder, UK equity fund manager at Foster investor Threadneedle Investments, said: “Amec’s offer is strategically consistent and financially compelling.”
Any deal is dependent on a number of pre-conditions, including due diligence, debt financing and a unanimous recommendation by the Foster board, which will nominate two non-executive directors to the Amec board.
Foster Wheeler has agreed not to solicit proposals from any alternative bidders until February 22.
Amec added that, while full-year trading was in line, it would miss its target of 100p per share in 2014, while that year’s operating earnings would also be £10m lower than planned due to the strength of sterling against the dollar.
Shares in Amec, which is advised by Bank of America Merrill Lynch, rose 25p to £11.04 as analysts at Citi said the deal could be “15-20pc accretive” to 2015 earnings per share.
However, not all analysts welcomed the deal. Alex Brooks at Cannacord Genuity said that at 9.6 times 2014 enterprise value to ebitda, Amec was valuing Foster much higher that its own rating of 7.6 times.
“We regard this transaction as poor value,” he said.