Oilfield services company WorleyParsons (ASX: WOR) will almost double in size if its proposed acquisition of Jacobs Engineering's energy, chemicals and resources division proceeds.

An international firm providing technical, professional and construction services across multiple industry sectors including architecture, engineering and construction, operations and maintenance, Jacobs Engineering is listed on the New York Securities Exchange.

WorleyParsons, which has a market capitalisation of $4.9 billion, says the deal will create a pre-eminent global provider of resources and energy services. The acquisition will diversify earnings, increasing exposure to more stable revenue streams, and generating significant cost and revenue synergies.

Morningstar senior equity analyst, Mark Taylor, describes the proposed deal as a "sensible, logical acquisition"

"There seems to be a number of solid synergies, but for me, the most sensible thing is using overpriced scrip to buy another business," he says.

oilfield oil rig

The $4.9bn deal would almost double the size of Worley Parsons

No-moat Worley Parsons is trading at a considerable premium to Morningstar's fair value estimate, which was $6.30 ahead of this announcement. The firm's last closing price was $17.84.

Taylor also notes the various other benefits the acquisition will bring the ASX-listed business, including greater exposure in North America and India – key markets occupied by Jacobs Engineering. It will also add another 30,900 employees across 27 countries.

Jacobs' ECR division had pro forma revenue of $US3.4 ($A4.78 billion), compared to WorleyParsons' current $A4.6 billion revenue.

"We are excited to combine Jacobs ECR's world-class capabilities with our global platform to create a leader across our key focus sectors, with greater earnings diversification and resilience," Worley's chief executive Andrew Wood said in a statement.

"Shareholders will have exposure to material EPS accretion, a strong long-term growth outlook and a conservatively leveraged balance sheet, while our employees will have increased opportunity for development."

The acquisition, which is subject to shareholder approval, would be funded by a combination of a $2.9 billion entitlement offer, $985 million in stock bonds to the US seller, and new debt.

Shares in WorleyParsons last traded at $17.84, around 60 per cent up on February 2016, before being placed in a trading halt prior to Monday's open.

 

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Glenn Freeman is senior editor at Morningstar Australia.

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