British Oil Probe Shows Value of Reading the Small Print: Gadfly

(Bloomberg Gadfly) -- It would be better if John Wood Group Plc wasn't trying to take over Amec Foster Wheeler Plc, bearing in mind the revelation that the target is under investigation by Britain's Serious Fraud Office.

But the Scottish oil services group has made its bid, shareholders have backed it and they'll have to live with the consequences.

The risk of a probe has loomed over the transaction, unveiled in March, for months. It would have come up during due diligence that Amec had been in contact with the SFO. Amec's annual report made that contact public just weeks after the deal was announced. The takeover prospectus published in May revealed Amec's view that the SFO "may well" put it under investigation. Investors on both sides approved the union regardless.

Now Amec has confirmed it is subject to an investigation focused on the past use of third parties and possible bribery and corruption and related offences.

This clearly creates uncertainty over the value of what Wood shareholders are buying in this all-share deal. But it is too late to renegotiate terms or walk away. To do so would need U.K. Takeover Panel approval, and that would mean showing events had taken a completely unforeseeable and colossal turn for the worse. Yet this was all predictable. And the financial impact, if any, may not be known until after the deal's expected completion in the fourth quarter. Good luck invoking any material adverse change clause.

What's more, the initial transaction was struck at a low 15 percent premium, suggesting Wood's bosses were mindful of the risks around Amec, a company that also carries significant asbestos claims.

Wood shareholders have some cushion if the SFO investigation turns into a sanction and a fine. The yearly financial benefits of the combination are put at 165 million pounds ($212 million), up from an initial 110 million pounds. These have an estimated present value of more than 1 billion pounds. The terms give Wood shareholders 56 percent of the combined company, implying a roughly 600 million pound slice of the value creation. 

The combined value of the duo has fallen by more than 800 million pounds, to just under 4 billion pounds, since they announced their union. Wood shares, tied to the oil price, have suffered worse while Amec has been at least supported by the small value transfer from Wood baked into the offer terms.

It's doubtful the companies would have agreed a tie-up had Amec already been under investigation back in March. Wood is looking into its own historical engagement of Unaoil, the energy services company that's subject to an SFO investigation, and which is connected to several probes involving other firms. With Wood's internal inquiry yet to conclude, there is some uncertainty around its share price irrespective of the Amec deal. 

Wood may one day look back and be glad of the takeover. Whether on these terms is another matter but there's no going back now.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

Chris Hughes is a Bloomberg Gadfly columnist covering deals. He previously worked for Reuters Breakingviews, as well as the Financial Times and the Independent newspaper.

To contact the author of this story: Chris Hughes in London at chughes89@bloomberg.net.

To contact the editor responsible for this story: James Boxell at jboxell@bloomberg.net.

Copyright 2017 Bloomberg News.

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