Going Big

WorleyParsons will pay US$3.3bn ($4.6bn) to acquire the energy, chemicals and resources (ECR) business of US-listed Jacobs Engineering in a deal that will more than double the size of the Australian company. The acquisition was a surprise, but we are positive on the transaction as the assets being acquired are complementary to Worley’s existing businesses and make strategic sense.

 

The acquisition is expected to be paid for via $3.7bn in cash and a further $895m of new debt in the form of a bridging loan. Equity funding will come via a $2.9bn capital raising – in the form of a fully underwritten 1-for-47 accelerated non-renounceable entitlement offer at $15.56 a share – and the issue of $985m in new WorleyParsons stock to Jacobs at $16.92 a share.

 

This is WorleyParson’s biggest transaction to date, and follows the $300m acquisition in 2017 of the oil and gas operations of UK-listed Amec Foster Wheeler that gave the company a foothold in the North Sea.

 

We note one of the key investment considerations for WorleyParsons was the potential for the company to be taken over. Dar Group, which had previously bid for full control, will be diluted by 5% in the initial stage of the capital raising to hold 18% of the stock, while Jacobs will become the second largest holder at 11%. These changes and the increased market capitalisation suggest a takeover becomes less likely.

 

Following the acquisition announcement, our net profit forecasts have increased by close to 100%, although our EPS estimates remain broadly unchanged with the higher net profit offset by a higher share count. Our net present value metric has declined 11% with the $3.9bn of equity raised being at a discount to our previous valuation, leading us to lower our target price to $21.00 from $22.50. We maintain our Buy recommendation.

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