Wood Group: weary shareholders should reap their reward

After decades of aiding oil companies to find prospective targets, Wood Group became one itself. Private equity group Apollo has tried to tempt Wood Group to the table five times since January. Following “feedback” from shareholders, Wood has decided to dicker with Apollo over a “final” offer of 240p per share in cash, offered earlier in April.

Apollo will now begin its due diligence in earnest and may water down or improve its terms subsequently. A deal at that price — 20 per cent above its opening approach — values Wood at just over £2.2bn ($2.7bn) including net debt.

There is symmetry to that number. Wood paid a similar amount for its then UK rival Amec Foster Wheeler (AFW) in 2017. Wood inherited problem contracts and historic corruption allegations — now settled — from the ill-fated deal.

Exceptional charges have averaged $150mn a year since 2017, Jefferies analyst Mark Wilson estimates. In 2022 Wood had negative free cash flow of $730mn, partly due to these legacy problems with AFW.

This would leave Apollo with a business moving away from its often lossmaking fixed price contracts to steadier cost reimbursable work in areas such as project management. Wood expects free cash flow, after the impact of legacy issues, to turn positive in 2024.

At 240p, Wood Group trades at an enterprise value of 6.7 times forward ebitda. That represents a discount to international peer Worley of Australia, which trades at 11.5 times, but a premium to Italy’s Saipem on under five times.

Frankly, this looks a decent price for shareholders. Imagine in five years Apollo sells Wood Group for seven times its forecasted 2028 ebitda, having borrowed 60 per cent for the purchase. After interest charges, plus some cost-cutting to lift future profits, the new owners should achieve low to mid-digit compound annual returns. More debt, to pay for an added dividend to Apollo, would improve an OK result.

Wood couldn’t ignore bidders forever. Shareholders rightly nudged it back to the table. But do not expect any significantly higher offers from Apollo either.