Citi Research Sees Little Upside To FMC Technologies-Technip Merger

M&A Talks

"We see the move as defensive in nature — removing cost overlap is a positive but the move is unlikely game-changing in terms of market share or profitability," analyst Mukhtar Garadaghi wrote in a note.

Garadaghi, who has a Neutral rating on FMC, noted, "Equipment is likely to remain a better business through the recovery," while saying FMC's "early-cycle leverage is diluted."

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"We see returns in most segments not recovering to predownturn levels," Garadaghi highlighted.

In addition, the analyst continued, "Valuation and returns outlook suggest little upside for the joint company." Garadaghi arrived at a discounted cash flow-based valuation of the joint entity at $29 a share, while a target PE multiple approach produces a similar outcome ($26.5/share).

"The bull case ($35/sh) lies around market share gain, faster offshore recovery and deeper cost synergies, with bear case ($23/sh) around timing of DW recovery, multi-year deflation in both SURF and equipment, and deal completion (for Technip)," the analyst noted.

Garadaghi said the offshore slowdown would suppress returns from the merger, "as shale will dominate the recovery in capex, while deepwater will lag and shrink by c40 percent in the medium term."

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"The combined entity remains offshore focused (>65 percent of EBIT), with top line likely to disappoint in the medium term (Citi 8 percent below consensus in 2018E/19E). FTI's Surface business is best positioned for recovery, albeit that exposure is diluted by the combination," Garadaghi elaborated.

Other Names In The Space

As a result, the analyst noted that Buy-rated Schlumberger Limited. SLB, Halliburton Company HAL and Baker Hughes Incorporated BHI are best positioned to benefit from a shale recovery.

"We believe SLB, HAL and BHI (all Buy rated) — all with strong leverage to shale recovery — should continue to be rewarded with a higher multiple vs TEC-FTI," Garadaghi concluded.

The analyst has cut the price target on FMC by $3 to $29.

At the time of writing, shares of FMC were up 0.72 percent to $27.80 on Thursday.