MergerMArketr
Petrofac represents test for industry's risk appetite – sector advisers
Analysis 07 DEC 2017
Prolonged SFO investigation likely deterrent to bidders
KBR, Saipem also tipped as potential bidders
Middle East focus unlikely to lead to competition obstacles
Petrofac [LON:PFC], The UK-headquartered oilfield services company, would test the limit of bidders' risk appetite despite being undervalued due to an investigation by the Serious Fraud Office (SFO), sector advisers said.
On 11 November, the Sunday Telegraph reported that the company is putting together information that would help it fend off any hostile takeover bid and has a refreshed advisory team preparing to carry out an in-depth study of the true value of the business.
The report noted that Petrofac’s share price has dropped sharply since the beginning of the SFO investigation into alleged links to a corruption scandal. On 11 May, Petrofac announced that the SFO had commenced an investigation into the company in connection with the SFO’s investigation into Unaoil, and that its CEO and CFO had been questioned under caution.
Petrofac’s share price dropped from 814.5p on 11 May, to a low of 349p on 7 June, and currently trades at around 418.6p, giving it a market capitalisation of GBP 1.45bn.
On 17 November, The Daily Telegraph cited City sources who said Schlumberger [NYSE:SLB], Halliburton [NYSE:HAL] and an unidentified party from the Middle East have hired advisers to consider an opportunistic takeover offer for Petrofac.
However, the reason for Petrofac’s devaluation - the SFO investigation - remains a major hurdle to any attempted takeover, the advisers said.
Risk appetite in the oilfield service sector is changing, and Amec Foster Wheeler’s involvement in the same investigation did not prevent its merger with John Wood Group [LON:WG]. But the ongoing investigation is still a major issue to put off potential Petrofac buyers, a sector lawyer said. What’s more, the investigation doesn’t seem to be progressing very quickly, a sector banker said.
Potential bidders must have concerns on how endemic the problem is at Petrofac, and would therefore need to be hugely opportunistic to take a run, the first sector lawyer said.
Ayman Asfari, chief executive officer and its largest shareholder with over 18%, is himself a key part of the investigation. On 25 May, Petrofac announced that Asfari, though remaining CEO, will not be involved in any matters connected to the investigation, and will have no role or responsibilities for engaging with or liaising with agents and consultants.
Yet, a new owner could reasonably claim no connection to past misdemeanours and rebrand the company, if the SFO situation can first be contained, a sector consultant said.
Another question is whether Asfari wants to exit Petrofac, as his stake means that any potential acquirer must engage directly with him, a second sector banker said.
He is a big part of Petrofac’s success, but he is also objective, another sector consultant said. He could look to leave in order to pursue other opportunities, especially once the SFO investigation has passed, this consultant said.
Bidder universe
Schlumberger and Halliburton may want to build up their presence in the Middle East, which is the main area of focus for Petrofac, the two sector bankers said. Halliburton, for example, has its non-US headquarters in Dubai, the first consultant said.
However, if they wanted to buy a business in this space they could have pursued the recently for sale North Sea division of Amec Foster Wheeler, the first banker said.
Joint ventures have presaged other oilfield service hookups, and Schlumberger and Petrofac did have a Mexican field rehabilitation venture, the first consultant said.
Schlumberger’s acquisition of Cameron and the merger of Technip and FMC Technologies were both preceded by joint ventures.
But these previous deals were vertical consolidation within the two parties’ value chain, while Petrofac’s engineering, construction and project management are less aligned to Schlumberger and Halliburton’s business model, the consultant suggested.
Petrofac is more closely aligned to KBR [NYSE:KBR], the engineering, procurement, and construction company that was separated from Halliburton, the consultant said. Another company in the space which has yet to do any major deal is Saipem [BIT:SPM], which has closed a recent restructuring, the second sector banker said.
Work also needs to be done to identify which areas of Petrofac’s business would overlap with any potential acquirers, as recent deals in the space have been the subject of merger control issues, a second sector lawyer said.
The Amec Foster Wheeler/John Wood Group merger saw the need to divest the aforementioned North Sea business, while the USD 28bn combination of Halliburton and Baker Hughes [NYSE:BHGE], first announced in 2015, fell through following concerns by US and European anti-trust regulators.
However, much of Petrofac’s revenue is accounted for in the Middle East and the same competition issues are unlikely to occur, the two consultants and first sector banker said.
That said, due to the uncertainty over whether long term contracts will result in profit, an acquirer would likely need to have some concentration in the same space, the second sector banker and first lawyer said.
This would suggest it is less of a target to potential private equity bidders, the lawyer said. Also, Petrofac is not a distressed business, so there is no opportunistic reason for PE to try to acquire, the first banker said.
Schlumberger and Saipem did not respond to requests for comment. Petrofac, Halliburton and KBR declined to comment.