A new international offshore contracting giant, with a market cap above $5.5 billion, backlog of $5.3 billion and over 12,000 employees, came into being last month with the combination of Acergy SA and Subsea 7 Inc. Meg Chesshyre looks at the rationale behind this high-profile marriage, with supporting analysis from Infield's James Hall and Gregory Brown.
The combined Acergy/ Subsea 7 entity's first day of trading as Subsea 7 SA was 10 January. Interestingly, its first move was to establish an offshore renewables division in Aberdeen but with a high-end, diversified fleet of 42 vessels and extensive fabrication and onshore facilities the new company will clearly have bigger game in the oil & gas sector in its crosshairs. It will be looking to position itself for a bigger slice, if not all, of the subsea engineering, construction and installation action associated with upcoming mega-projects in offshore hot spots such as Brazil and West Africa.
Chief executive of the combined company is Jean Cahuzac, a Frenchman who knows his way around the offshore business having served in senior management posts with Schlumberger and Transocean for many years before joining Acergy as CEO in 2008. He says of the deal, first announced last June and eventually completed on 7 January: ‘The creation of a global leader in seabed-to-surface engineering, construction and services contractor to the offshore energy industry worldwide will allow us to secure and deliver offshore projects of the size and complexity that we expect will emerge in the coming decade.
‘Subsea 7 SA will benefit from the value created by the combination of our people, our expertise and our highly complementary fleet, supported by a larger capital base and the synergies expected to result from the combination. Our leadership position and global footprint will give us opportunities to grow faster than either Acergy or Subsea 7 could have achieved on their own.' Chairman Kristian Siem adds: ‘When we announced the intention to combine both organisations we said this was an excellent strategic fit, with industry fundamentals strongly supporting the logic of the combination. Now that we have closed I strongly believe that the logic behind the combination is correct. The new Subsea 7 is well positioned to deliver enhanced long-term value for our clients, our people and our shareholders.'
‘The combined Subsea 7 will take its place in the top tier of the subsea contracting space. With a broad regional diversification and ability to manage local content in West Africa and Brazil, the group is well positioned to compete for the number of large offshore installation contracts that are in the market, including Brazil's Guara and Tupi Northeast developments.
‘Acergy has been stronger in West Africa, Subsea 7 in Brazil. Acergy has invested heavily in diving and the Borealis asset gives them coverage in the conventional sector, as does the SapuraAcergy joint venture in Asia Pacific. Subsea 7 has a greater number of reel-lay assets through vessels such as the Seven Oceans and Seven Seas. Subsea 7 also has a fleet of ROVs – one of the industry's largest – at its disposal through the iTech business unit, while Acergy has traditionally relied upon rental companies. The merger suggests that this will now be brought in house.
‘The enlarged group state they have a number of synergies which include a combined global reach, access to particular specialist groups such as iTech and NKT Flexibles as well as a strong vessel mix and limited crossovers. Management expect further synergies to include reduced bidding costs, lower third-party rental costs (primarily on the Acergy side) and lower vessel downtime. The group indicate a cost saving of $100 million, which would represent close to 2.5% of the combined group's cost of goods sold (2011: $3.9 billion).
‘The merger has long been mooted, but until last month had failed to progress beyond initial discussions. The reasons for the lack of transaction were twofold: first, the potential for antitrust disruption and secondly issues with personnel and the positioning of key people. The appointment of Kristian Siem as chairman deals with much of the latter, but antitrust, particularly in the North Sea, has remained an issue. The combined Subsea 7 was advised to sell a pipelay vessel and a dive support asset by the UK Office of Fair Trading (OFT) in order for approval to be given. In a statement dated 21 December 2010, the OFT said the merged companies would raise competitiveness concerns over "small diameter rigid pipelay services alone, and projects which require the provision of both small diameter rigid pipelay and diving services".
‘The reasons for merging are relatively straightforward. Acergy and Subsea 7 operate primarily within the SURF market, with their key competition being Technip and Saipem – each of which is larger. In order to compete with their direct competition Acergy and Subsea 7 are likely to need a fuller, more rounded service provision. By combining, the two groups would be able to service a similar scope to their competition.
‘Furthermore there is the fact that contract values have increased significantly in recent years. Acergy and Subsea 7 regularly tender for contracts whose value is in excess of $1 billion. Acergy announced that it had bid on a contract with a value in excess of its market capitalisation. The combined entity would have the added security of a larger company, thereby increasing their likelihood to win charters. The movement towards higher value EPIC work is highlighted by the presence of Acergy's successful tender for the Clov field offshore Angola for a value of $1.3 billion. This is joined by projects such as Greater Olowi, White Rose and Gumusut-Kakap.
‘In the long term it is important to discuss the reaction from operators in regards to the merger of Acergy and Subsea 7. Historically operators have been keen to have a choice of contractors, and bringing four SURF players into three will be a concern to them. This filters through to the likes of Petrobras who would usually request in excess of three bids for tenders.
‘The requirement for an additional contractor in the market space therefore creates an opportunity for a new entrant. This opportunity has already been picked up upon and is highlighted in Ezra's recent purchase of Aker Marine Contractors (see ‘Digest'). However, despite having access to a number of well-equipped vessels we would not expect Ezra/AMC to compete in the highest echelons of the market due to operator inertia in awarding large-scale installation work to a relatively untried operation.' OE
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