Two fierce rivals, seismic surveying companies PGS and TGS, are merging. This is with a history of numerous takeover attempts from TGS.
TGS has a market capitalization of NOK 18.6 billion, based on Friday’s closing prices, and will have two-thirds of the shares in the new company. PGS, which has a heavy debt load, was priced at NOK 7.6 billion on Oslo Borse on Friday.
On Monday morning, trading of PGS stock and TGS stock on the stock exchange was suspended. When trading opened, stock prices went in different directions. PGS stock is up nine percent, while TGS stock is down six percent.
– Although the agreement seems reasonable from an industry perspective, we argue that PGS shareholders are receiving a generous payment, says Kim Ogedal, SEB analyst.
TGS executives Christian Johansen and Sven Bori Larsen will lead the combined company, the stock exchange announcement on Monday morning said. The two companies’ announcement comes without adhering to all the terms of the merger. The agreement will not be signed before next October, and the merger is expected to be completed in the first half of next year.
-We know each other well, we competed well, and we were partners in many projects. You know, we’ve sniffed them before too. But why is this happening now? “It was at that time for PGS and we felt the time was right, and the valuation was agreed,” says CFO Sven Børre Larsen at TGS.
– Who took the initiative and how long did the process take?
-We know each other well and meet often. Larsen says there are so many points of contact that it is difficult to determine who initiated a meeting with whom.
– so interesting
– Maturation has occurred over a long period of time. There are many factors at play, but now the assessment of both was that the time was right, and that this was right for both the market, shareholders and employees, says PGS Chairman Walter Kvam.
In 2020, Qvam rejected TGS’s offer to buy the PGS seismic library, but refers to that as something else entirely. Although PGS was the company that rose on the stock market on Monday, Qvam believes it was not exclusively about price.
– Here two complete companies are combined that complement each other well. Not just with the multi-client libraries, but also with regards to the ships and what both parties do with the new energy. This is simply a very interesting combination.
– Was it a long process?
– It’s not a matter of many weeks, if I may put it that way. There are not many players in this market, so the two companies may have thought in their own strategic operations that a merger could be a scenario. So it was a short process.
PGS Chairman Walter Qvam. (Photo: Ellen Hoyland)
– Was it PGS that came creeping in?
-I would say that both parties were very interested from the first contact. No one came crawling, and no one came flying either, says Qawam, adding:
This merger creates a unique company with interesting breadth and depth and the ability to innovate to meet changes in the energy market. Ultimately, this may be as interesting as the size itself at the time of the merger.
You will now own the boats
Aasulv Tveitereid is the largest private investor in TGS, with shares worth NOK 300 million. He has followed TGS since the 1990s, as a student, analyst and now investor.
– This merger is very positive – Strategically, the timing is absolutely perfect. I believe this will lead to a highly consolidated seismic market, where the prospects for return on capital will likely be the best in the 30 years I have followed the industry, Tvetrade wrote in a text message.
Aasulv Tveitereid (center) with Ole Peter Kjerkreit (right) at a previous quarterly presentation at TGS. (Photo: Gunnar Lehr)
According to an update from Sparebank 1 Markets published by TDN Direkt, the agreement between PGS and TGS will include a premium for a PGS stake of more than 20 percent. PGS’s closing share price ended Friday at NOK 8.34.
“Compared to the closing price on Friday, the merger will result in NOK 10 per PGS share, representing a premium of 21 percent compared to the last closing price. This will result in 62 million new TGS shares, resulting in a dilution of 33 percent. Although some in the TGS shareholder camp may be surprised by this deal, we claim that it makes sense,” Sparebank 1 Markets wrote according to TDN Direkt.
John Olaison, analyst at ABG Sundal Collier, is looking forward to some action. He believes it is clear that TGS is the acquiring company.
– It seems clear that TGS is the one providing the PGS service. PGS shareholders get a bonus, while TGS gets new management. At the same time, this is perhaps a clear acknowledgment by PGS that the market for boats is tightening when the main buyer of boating services, TGS, buys the PGS fleet, says Olaisen, and notes:
– Together they will create what will become the largest multi-client services provider in the world.
-Necessary and natural
TGS CFO Sven Larsen says the company did not always want PGS, but it was the right deal as the market is now evolving.
-It changes our business model somewhat, because we never owned boats before. But this trend is already pointing for us for some time, because we want to be a fully integrated seismic company. We see it as necessary and natural to have the capacity on boats,” says Sven Larsen, CFO of TGS.
PGS surprised many when the company raised NOK 850 million in new shares last spring and then NOK 1.5 billion in November. This summer, the debt-laden company allayed fears of a new problem, when the earthquake company raised $75 million in debt refinancing.
Larsen isn’t worried about PGS’s debt problems:
– As you know, TGS has a very strong balance sheet, so the combined company will also have a strong balance sheet. Also, PGS has reduced its net debt a bit in recent years, so the situation looks very different than it did a year, two, three, four or five years ago.
The largest owner of TGS is Folketrygdfondet with ten percent of the shares. Folketrygdfondet does not own any shares in PGS, which has a split shareholder structure.
A Bloomberg overview shows that nine out of ten analysts have a buy recommendation on TGS, while seven out of 12 say the same about PGS stock.
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