By Darius Snieckus
OGJ Online
With the ABB Group's takeover of Norwegian contractor Umoe AS's oil and gas businesses last August, Norway's offshore landscape lost one of the handful of remaining large players that had been dominant in the province over the last decade. Even so, the shrunken regional contracting market off Norway that emerged from the industry-wide downturn in 2000 will clearly no longer comfortably support the likes of companies Aker Maritime ASA, and Kværner AS, and Switzerland's ABB as it once did.
Something further still has to give�and with Aker's announcement last week of an ambitious and detailed plan that would generate annual synergies of 1 billion kroner by pulling together Aker's main business units as well as its yards division with those of compatriot Kværner�all eyes are on these two arch rivals.
For ABB, which ABB bought up Umoe's oil and gas units in a move to "expand (its) service activities and to grow in the important Norwegian market," this round of consolidation has proved rewardingly straightforward.
By buying Umoe's Oil & Gas, Technology Services, and Electro divisions, ABB foresaw tapping revenues of $300 million/year, and "strengthening (its) ability to undertake turnkey projects for process plants, topsides, and floating production systems" both on the Norwegian Continental Shelf (NCS) as well as internationally.
The acquisition has already borne fruit for ABB far from the NCS, with the company partly attributing its success in landing the $260 million contract to design the offshore Khuff gas project in Abu Dhabi to its having acquired Umoe's oil and gas division.
For Aker and Kværner, though each has long acknowledged the strong "industrial logic" behind a tie-up, the path toward consolidation nevertheless continues to be infinitely more vexatious.
The chronology of the various takeover or merger bids by one company or the other stretches back, in the latest pitched battle between the two, to last July, though, as one Norwegian Ministry of Petroleum official said recently, "it has been going for 10 years."
After a deal agreed in June through which Aker would hand over most of (its) operations to Kværner fell through after the latter's board backtracked on its decision, according to Aker, its management decided that "if Kværner won't take over Aker, then we'll have to do it the other way."
The "other way" meant acquiring a controlling interest in Kværner through a share buy-up. On July 12, Aker snapped up a swathe of shares equal to a 26.39% stake in its rival�a percentage trimmed to 17.8% after the European Commission threatened to launch an investigation in to the share purchase as "anticompetitive," but sufficient to become Kværner's largest shareholder.
In less than a month, Kværner had countered with a 4.5 billion kroner all-shares deal to acquire what was now its majority shareholder and forge a "New Kværner," which it called a "global player with a complete range of products and services for the most attractive segments and regions of the oil and gas industry." Aker, to the surprise of few, rejected the overture�then Kværner 's fourth approach in 15 months�within hours, as undervaluing the contractor, counsel which Aker shareholders took to heart when it came time to vote on the proposal.
The proposed takeover by Kværner, in theory at least, was on the table as late as Sept. 21, with the company expressing a desire for a "genuine solution" to combine its oil and gas operations with Aker. The industrial logic of the union in Kværner's view, soon went begging.
For one cornerstone to Kværner's takeover had been the corporate fit between its subsea technology experience and Aker's deepwater business, two areas, of course, seen as likely to generate the majority of work in the coming years for contractors in the offshore oil and gas industry. And in October, Aker sold off its Houston-based Deepwater Company business unit to France's CSO Group SA in a $625 million deal, undermining that logic.
Aker's plan for a 'stronger Kværner'
After Aker shareholders rejected the multi-billion kroner bid by Kværner in August, Minister of Petroleum Olav Akselsen said, in light of the fact that the Norwegian market was "simply no longer big enough for both of them," a tie-up of some description had to be seen as inevitable. Eventually, he said, the rivals would "need to cooperate in some form�either through a merger, an alliance, or some other arrangement�and then seek to expand their geographical markets."
This, in the simplest of terms, says Aker Executive Vice-Pres. Jon Erik Reinhardsen, is the strategy behind Aker's latest "amalgamation" proposal to Kværner, announced by the contractor in Oslo last week, to create a "future oriented" sector technology company based in Norway but with international horizons.
"Kværner has a lot to gain from this combination. We both have ambitions to expansion internationally, but such expansion needs to be substantiated by a strong position in one's home market because it costs to expand, you have to have the balance sheet," says Reinhardsen. "And we have that, and we could be much stronger, both of us, if we could capitalize on the synergies in our home market, get more competitive, and use this as a base from which to move out."
Under the detailed Aker plan for what it calls a "Future Kværner-Aker," Kværner Oil & Gas, Aker Maritime, and the Aker RGI-owned shipyards group Aker Yards would be brought under one banner. This merger, said Aker, would clear the way for new investment and growth in the combine's core areas, and "the possibility of added values for the shareholders without the injection of fresh equity capital."
The hypothetical merged company, according to Aker, would balance "a sound base in its domestic markets and with a major international potential," and have turnover of around 20 billion kroner this year, growing "organically" to nearly 30 billion kroner the year after.
Aker calculates yearly net cost and market synergies achieved through its plan of between 550-600 million kroner within the combined oil and gas operations.
Kværner-Aker, in Aker's vision, would be built around three core business streams�Technology & Products, Field Development, and Services & Operations. In the first of these businesses, stresses Reinhardsen, there is already a strong "complementary" connection between the two contractors' ranges of subsea, surface, and drilling and well technologies, and established export potential, while in terms of field development, a merger between the Kværner and Aker would pay dividends in offsetting market overcapacity.
"The field development market in Norway, like in the UK, is in shambles, and has been for years, because of overcapacity," he says. "After the numerous restructuring, no contractor has a truly solid foundation and the margins are still too small. Even without this merger, we feel Aker and Kværner need to realize that the field development market has to be restructured anyway. As one merged group, we believe we could take the lead in this restructuring in a controlled manner.
"This market is going to have to restructure. So do we restructure it ourselves or do we torture the life out of one another through competition before it happens?" Reinhardsen added.
In the wake of the sale of its deepwater division to CSO, Aker is intent on moving back into the international field development market, but "thinking differently and with a new approach"�as a niche player piggybacking larger contractors and oil companies themselves into regions where it no longer has a sizeable presence.
Unlike Kværner's last takeover plan, which placed a heavy emphasis on the combine's future as an engineering, procurement, construction, and installation (EPCI) contractor, Aker feels such a role is fraught with major risk.
"If an oil company wants us to embark on field development in terms of skills and portfolio base, we can do that," says Reinhardsen. "But we wouldn't undertake the risks associated with being a main contractor on an EPCI contract. Only a very few companies have the bottom line for that anymore."
Service & Operations, he emphasizes, is an underestimated market with a huge and growing potential upside�Aker calculates a operations expenditure market in the North Sea and further north currently worth some 10 billion kroner to the contractor�where, again, there is a good fit, in this case region, between the two companies.
"And this is a market that we see having a 50-80 year horizon," he notes. "So for us, even though the margins are not huge, neither is the capital you have to employ�so there is a very good return, and lower risk."
Another feature of the combine would be the amalgamation of Aker Yards and Kværner Shipyards, forging a Norwegian-based shipyards group with highly specialized yards in Finland, Germany, Norway, and the US. The shipyard group would be owned by Kværner and Aker RGI to start, with the latter as majority shareholder.
Kværner's Engineering & Construction unit, under the Aker proposal, would remain one of two independent and specialized core areas in Kværner outside of the Oil & Gas division, but "certain smaller sections" of the division would be transferred to the oil and gas technology company.
Decision rests with shareholders
Kværner management rebuffed Aker's amalgamation proposal on the same day that it was made. In a statement, Kværner said the plan for the merged company did not provide sufficient strength to meet the challenges (of) broadening its sphere into international markets and technology areas, especially in areas such as subsea and deepwater production, adding that it did "not anticipate synergy gains at the level indicated by Aker through a combined activity."
However, as with Kværner's bid for Aker, the final decision will rest with the shareholders'�who will all see details of the Aker plan in the coming weeks. Kværner's annual general meeting in May is likely to be the first formal chance to sound out shareholders on the idea of a "New Kværner-Aker"�as envisaged by the latter�but those which Aker management has polled "think it is a sound idea."
"The strategy and direction of any company is, at the end of the day, decided by the shareholders," says Reinhardsen. "So even if what is said by Kværner management is important, what remains decisive is what the shareholders together want as a new direction for the company."
"What we are saying now is, 'This is our proposal'. We believe this will create value for both Aker and Kværner shareholders, that it has many advantages for both the employees and future of the two companies," he adds.
"We are just one of the shareholders. We hold 17.8% of Kværner: we can't vote in our own proposal," he notes.
Reinhardsen points out that even if Aker's merger plans fall on deaf ears, the development strategy put forward for the proposed combine would still be used by a standalone Aker because the company believes the fundamentals are sound.
"We believe in this plan�regardless of Kværner. Together, we would have more momentum�and Kværner a stronger balance sheet if it moved ahead with us rather than alone. It is as simple as that in terms of industrial logic. When I hear what Kværner are saying and we are saying, I think we are both heading in the same direction, but we are formulating our ambitions slightly differently."
"The important thing from Aker's perspective is to establish a new organization that has the strongest possible starting point."
