Monday, 13 January 2014

Amec - cash is no longer burning a hole in their pocket

The UK-listed 'international engineering and project management company' Amec have had a busy few months. 'Back in August they talked with Kentz, with whom they had some energy sector overlaps, but that deal did not come to anything.  Today, they have announced an even bigger potential deal: 

'AMEC...announces that it has provisionally agreed with Foster Wheeler AG (Foster Wheeler) the outline terms for a recommended cash and share offer for all of Foster Wheeler's issued and to be issued share capital. Foster Wheeler shareholders would receive approximately 0.9 new AMEC shares and $16.00 in cash, together representing $32.00 for each Foster Wheeler share (the 'possible offer'). The possible offer equates to a value of approximately $3.2 billion (£1.9 billion)'.
 
A US$32 offer for Foster Wheeler is a tiny 1% premium to their closing share price on Friday.  Clearly Amec are trying to appeal to the synergy potential between the two.  
 
Now talk is easy but I thought the key comment on synergies between the two companies was this one: 
 
'annual cost synergies, estimated by Amec to be at least US$75m, and additional significant tax and revenue synergies'. 
 
Now US$75m is just 2.3% of the purchase price.  That's not very exciting although clearly it will be built upon.  I would be surprised if they did not get to US$150m over time - but that's still over x20 the price paid. 
 
The other comment that needs to be taken into account is this one from the Amec CEO:
 
'we would expect double-digit earnings enhancement in the first twelve months'
 
Prior to this proposed deal, Amec had net cash on the balance sheet.  After the deal, the company estimates it will have debt, but at a x1.6 ND:ebitda ratio this is still not particularly high.  This financial engineering is what is driving the 'double-digit earnings enhancement'. 
 
And then, just to confuse matters even more, whilst Amec 'has performed in line with expectations', the company will not hit its 100p per share 2014 EPS target and cited the strong Pound against the US Dollar as one reason. 
 
So a deal which works best as a financial engineering exercise combined with a small pulling away from 2014 targets.  No wonder the share has moved in a 7% range today (and is currently slightly up on the day as I write).
 
I have written before about waiting for a 1000p a share Amec price and then adding each new 50p below this level.  That still feels right to me whilst we see if the deal completes and the numbers bed down.  Still, analysts were waiting for a number of years for a big deal from the company.  Now they have got it. 
 
 

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