EVERYONE knew Wood Group was about to sell its well support unit to GE, but few thought it would fetch as much as $2.8bn (£1.75bn).
Management have covered themselves in glory with this deal. Whatever multiple you look at – 17.4 times 2010 ebitda or 30 times earnings – it is clear that Wood drove a hard bargain.
The firm’s decision to return $1.7bn of the proceeds to shareholders, most likely through a buyback, will be 20 per cent accretive to earnings per share, according to Wood’s advisers. As surprises go, this is a particularly nice one.
Investors would be wise to look again at other businesses with similar assets, after GE was willing to pay such a handsome sum for a well support arm. AMEC and Petrofac in particular deserve attention.
It wasn’t just the multiples, however. Management rightly believes that the deal will allow them to focus on the firm’s core oil and gas business, as well as its gas turbine arm.
We reckon the firm is also a more attractive takeover target, especially for the likes of AMEC. The pair now share a core focus on engineering, and would be a neat fit, although yesterday’s deal will make any valuation more challenging.
So what of the rest of the group? Well Support accounted for $166m of group ebitda in 2010, around 41 per cent, but the firm still looks undervalued after yesterday’s jump.
The residual Wood Group now trades at around 12 times earnings, against a sector average of around 18 times, suggesting a flurry of upgrades in the pipeline. There will likely be some profit taking in the short term – there always is after a rally of this kind – but long-term investors should sit tight.