Faced with increased competition from larger rivals, France’s Technip and FMC Technologies Inc. (NYSE: FTI) said May 19 they will combine into a global company to reduce costs.

But some analysts question whether the deal will serve as a step in the right direction or a cautionary tale.

The $13 billion, all-stock FMC readjusts the balance of power in onshore and offshore services tilted by Schlumberger Ltd.’s (NYSE: SLB) acquisition of Cameron International. And it may spur others in deep water to consider mergers that create better economies of scale.

However, the offshore problem remains that operators in the water must compete with onshore developments and shale plays in particular that are typically more profitable.

“FMC and Technip had been dating for over a year through the Forsys Subsea JV, touting the benefits of cost reductions, including that 25%-30% of cost reductions can be made with the JV,” said J. Marshall Adkins, an analyst with Raymond James & Associates Inc.

Still, the cost savings from the JV doesn’t appear to have done enough to lower expenses, causing the companies to fully integrate—the factor that drove Schlumberger’s acquisition of Cameron International, Adkins said in a May 20 report.

“Both companies needed to do the combination to remain at the lower end of the offshore cost curve and remain competitive with industry peers,” he said.

M&A Prospects

Mark Brown, an analyst at Seaport Global Securities LLC, said the combination could generate some theoretical discussions for other mergers. In particular, GE Oil & Gas (NYSE: GE) and National Oilwell Varco Inc. (NYSE: NOV) were left empty handed after the failed merger of Baker Hughes Inc. (NYSE: BHI) and Halliburton Co. (NYSE: HAL).

“However, these other combinations do not make as much strategic sense to us and do not have as much of a natural alignment of businesses,” Brown said. “We also expect that the TechnipFMC transaction could stimulate interest in read-through M&A involving Dril-Quip Inc. (NYSE: DRQ), Aker Solutions ASA and Subsea 7 SA.”

Such mergers are more likely to be triggered in similar models driven by boosts in production while reducing costs, said Kurt Hallead, co-head of global energy research at RBC Capital Markets.

“The approach combines subsea equipment and reservoir/sub-surface knowledge and expertise to attack the problem from both angles,” he said, noting that the Baker Hughes alliance with Aker Solutions uses the same approach. Costs are reduced by equipment standardization and streamlined engineering.

“This appears to be the approach that most of the other players are taking. TechnipFMC and the GE and McDermott International Inc. (NYSE: MDR) consulting venture fall under this approach,” Hallead said.

Broken Mainsail?

The question remains, as always, whether the deal will work.

Adkins said it helps: “While this merger creates a step change in supporting the offshore cost structure, it remains clear that much more will be necessary before offshore projects can become competitive.”

Other reactions ranged from slight concerns about risk to saying FMC’s decision would fundamentally change the company.

Bianchi said FMC will now be exposed to risks associated with the energy and chemical (E&C) business.

Others blasted the deal as a sign that FMC has lost its way. The Technip merger represents a dramatic shift in strategy and Barclays downgraded FMC’s rating to “equal weight.”

“Our investment thesis is in tatters,” said Barclays analyst J. David Anderson in a May 20 report.

“Since going public in 2002, the investment narrative around FMC Technologies was a capital-light model that had little capex or working capital, a strong backlog and among the highest returns in the industry that led to a premium multiple,” he said.

FMC investors will now see two-thirds of revenue driven from lump sum turnkey projects, exposure to construction risks and project cancellations and structurally lower returns with more invested capital, he said.

Engineering Equity

However, Brown said the transaction sets up a “merger of equals” with each company assigned seven directors to the board, Brown said.

Under the terms of their agreement, Technip shareholders would receive two shares of the new company, TechnipFMC, for each share of Technip and FMC shareholders would receive one share.

Technip will contribute 61% of the new entity's enterprise value and own 51% of the new entity. FMC contributes 39% in enterprise value and will own a 49% stake in TechnipFMC.

The deal is expected to deliver pre-tax cost synergies of $200 million in 2018 and at least $400 million in 2019. On average, FMC will contribute 41% of EBITDA to the new business before synergies for 2017 and 2018 based on consensus estimates and own 49% of the combined entity, said Marc Bianchi, analyst at Cowen and Co.

The combined company will offer a new generation of comprehensive solutions in subsea, surface and onshore/offshore to reduce the cost of producing and transforming hydrocarbons.

TechnipFMC would employ 49,000 workers in more than 45 countries. In 2015, its combined revenue would have been about $20 billion and EBITDA of roughly $2.4 billion. As of March 31, the two companies had a backlog of projects worth $20 billion.

John Gremp, chairman and CEO of FMC, said the combination creates significant value for clients and all shareholders, “expanding the success that FMC Technologies and Technip have achieved through our alliance and joint venture, to capitalize on new opportunities and drive accelerated growth.”

TechnipFMC would be led by executive chairman Thierry Pilenko and CEO Doug Pferdehirt.

Cost savings would come from:

  • Supply chain improvements;
  • Reduced infrastructure costs; and
  • Other costs associated with procurement and corporate overhead.

The deal is expected to close in early 2017.

Darren Barbee can be reached at dbarbee@hartenergy.com.