Oil services company Wood Group has agreed to buy rival Amec Foster Wheeler for 2.2 billion pounds ($2.7 billion), seeking rewards from the fast-growing U.S. shale energy sector.
Wood Group, a 35-year old company based in the Scottish city of Aberdeen, grew out of helping companies in the now declining North Sea oil basin. It said the deal would enable it to expand in areas best placed to benefit from an upturn in commodity prices, notably the U.S. onshore shale oil and gas sector.
"We think we have positions in those parts of the oil and gas markets that will see growth first," Wood Group Chief Executive Robin Watson told analysts.
Oil companies have had to adjust to lower prices after crude prices tumbled from a peak of over $100 a barrel in 2014 but a recent uptick above $50 a barrel has spurred output especially in the U.S. where production costs are low.
Amec, which counts major oil companies such as BP, Shell and Exxon Mobil among its clients, had been planning to announce a 500 million pound rights issue next week and to suspend dividend payments to cut costs and boost cashflow. The rights issue has been called off.
Watson said the acquisition would dilute its oil and gas unit to 60 percent of the business, down from 85 percent now and 95 percent before the oil price collapse. The weighting will instead increase for new businesses, such as engineering design services to power plant projects or consultancy services to mining companies.
"We're in a part of the cycle where having 60 percent oil and gas is a good place to be," Watson said.
Amec Foster Wheeler, itself the product of an expensive merger in 2014 just before the oil market downturn, has been struggling with high debt. A year ago it removed its long-serving Chief Executive Samir Brikho who led Amec's $3 billion acquisition of engineer Foster Wheeler.
The paper deal valued Amec Foster Wheeler shares at 5.64 pounds each and they traded just below that level at 1330 GMT. Wood Group shares also responded positively, gaining 3 percent to 7.75 pounds.
Amec Foster Wheeler investors will receive 0.75 new Wood Group shares for each share held, the company said. They will own 44 percent of the merger group but Wood Group executives will take the top jobs.
Chief Executive Watson and Chief Financial Officer David Kemp will continue with their current jobs in the new group. Wood Group Chairman Ian Marchant will also retain his role.
Wood Group said it expected annual cost savings to reach at least 110 million pounds, while the one-off costs would be around 190 million pounds.
Savings include "corporate and administrative efficiencies", the companies said, hinting at job cuts in places where there is overlap. The merged company will employ 64,000 people.
"While materially above our AMFW valuation, we can see WG consolidating its market-leading UK North Sea business, expanding product lines in the US and possibly increasing the scope for asset sales," Jefferies analyst Mark Wilson said.
The deal is the latest in a line of mergers in the oil services sector, driven by the potential upside many see from more stable oil prices.
General Electric Co agreed to merge its oil and gas business with Baker Hughes Inc in October to create the world's second-largest oilfield services provider.
Rival Halliburton Co had earlier tried to buy Baker Hughes to compete for customers with Schlumberger NV, the world's largest oilfield service provider.
JPMorgan acted as lead adviser to Wood Group, securing a key role on another big UK deal this year after Standard Life's merger with Aberdeen and Tesco's purchase of Booker.
Credit Suisse, which works with Wood Group as corporate broker, also helped the company on the deal while Goldman Sachs and Bank of America Merrill Lynch advised Amec Foster Wheeler.
(Additional reporting by Arathy S Nair in Bengaluru, Karolin Schaps and Pamela Barbaglia in London; Editing by Keith Weir)