We believe that the proposed Technip/FMC Technologies merger is strategically the right move. At least it offers the client base the option of an integrated subsea package, has the potential to save money and in the meantime, in what is not a minor blip in the offshore construction cycle, enables even more costs to be extracted. Ultimately the oil industry wants solutions not components, and technology has to be applied somewhere – the tree, the flowline, the riser or the platform. The potential new entity can apply it where best. However strategically valid, mergers are financial transactions and Technip is merging with a wellrespected, highly valued US entity, as valuation disparities are high. As such it brings 66% of combined equity and the net cash, yet gets 51% of the merged entity. Our analysis shows the deal as suboptimal to Technip holders. In addition, Technip shareholders now are subject to variances in FMC’s earnings outlook, which we feel is less robust near term than Technip’s. As such, we remove the 1% point discount rate benefit which we gave Technip in our DCF-based price target, which reduces it to EUR50/share. With limited upside potential, we downgrade to Underweight.
Same industry, same dynamics, different valuations: FMC and Technip both serve the offshore industry. Both service the same projects on the same basis, but execute in different locations with a different risk profile. Yet, FMC is trading on a 35-50% EV:EBITDA 2016-17F premium and our analysis finds it hard to understand why. 2.5:1 not 2:1 more appropriate: The proposed merger terms are clean. Two companies with the same market capitalization and Technip shareholders get 2 shares in the new company giving them 51% of the new entity. However, US versus EU valuations are different. Both we and our US colleagues use DCF-based valuations, but as with all DCFmethodologies
they are just a guide, subject to inputs. If we use similar assumptions in our Technip DCF as our US colleagues, then our previous stand-alone price target would be over EUR70, rather than EUR58, implying that an exchange ratio closer to 2.5 would be more appropriate, giving it ca10% more of the combined entity. The elephant in the room: The debate we have seen with investors centres on the offshore side of the business. However, the onshore side brings the balance sheet to support the slowdown over the coming years and is the genuine asset light component in the new mix. However, domestic US investors have been fed a diet of reimbursable orp onshore E&C, schooled against lump sum and its inclusion may be hard to swallow.