If you can’t beat ’em, join ’em.
That seems to be the guiding principle behind WorleyParsons Ltd.’s audacious takeover of Jacobs Engineering Group Inc.’s energy, chemicals and resources businesses.
The Australian company, which makes most of its money from designing, building, operating and maintaining refineries, offshore rigs and other giant pieces of equipment for the oil and gas industry, will more or less double in size as a result of the $3.3 billion deal announced Monday.
The amount WorleyParsons is paying pretty much matches its own A$4.7 billion ($3.3 billion) market capitalization on the eve of the deal. Even with an equity raising and a placement of shares to Jacobs taking the edge off that bill, its net debt will more than double, from A$663 million to A$1.5 billion. (The company counters that its leverage ratio on completion of the deal will be about in line with the fiscal 2018 ratio on a pro forma basis.) The work backlog – a measure of projects in hand that gives engineers an idea of their medium-term revenue – will go from A$6.4 billion at the end of June to about $11.5 billion after adding Jacobs’s $7 billion order book.
That has the feel of a business making up for lost time. When the last energy boom came to an end and oil producers started cutting back on capital spending, WorleyParsons gave a series of profit warnings and retrenchments that ultimately left it with revenue about half of what it had been four years earlier.
While that pattern of pulling back has been reflected across the industry, the big three U.S. players that dominate oil services – Schlumberger Ltd., Halliburton Co., and General Electric Co.’s spun-off Baker Hughes unit – have been bulking back up again for a while, a trend identified by my colleague Liam Denning last week. Even second-ranked European players like TechnipFMC Plc and John Wood Group Plc have been putting on weight via acquisitions.
WorleyParsons itself has been in the frame as a takeover target, thanks to the presence of Dubai-based engineering company Dar Group, which has been slowly creeping up its shareholder register since last year.
The Jacobs deal will certainly help the top line of that picture, and perhaps put off Dar Group from getting any more aggressive. But further down the income statement, the picture is less persuasive. The Jacobs unit’s operating margins aren’t markedly worse than those of its suitor, but they won’t help WorleyParsons catch up to Schlumberger and Halliburton in profitability terms.
Its heavier involvement in downstream and chemicals businesses makes the combined company a less concentrated play on upstream revenues than WorleyParsons was formerly – but again, with exploration spending picking up this is arguably the wrong time to be making such a shift.
On top of that, the price paid looks handsome, or even rich – particularly when you consider how much the Australian company is having to stretch to fund it. Oil and gas services and heavy engineering deals in developed countries typically transact at a multiple of about 8.4 times Ebitda, according to data on 319 transactions compiled by Bloomberg.
That multiple, or something like it, is quoted in the takeover announcement – but the company has to do some financial gymnastics to get there. The 8.5 times multiple mentioned is “post A$130 million cost synergies,” a fairly substantial magic asterisk you don’t typically see in these sorts of deals. Without that adjustment, the number rises to 11.5 times. WorleyParsons said in response to this column that earnings accretion should be factored in: As much as a 50 percent increase taking into account deal synergies.
Even that understates it. The multiple is defined at the 2018 fiscal year average exchange rate of 78 cents to the Australian dollar, rather than the much weaker current level of 71 cents. Recalculated at current prices, it rises to 12.5 times.
WorleyParsons is still recovering from a major restructuring. It should hope that paying such a rich valuation gives it a chance to regain the North American business it lost in the last crash. If not, another bout of indigestion may not be far off.