CGG’s shareholders should thank Technip (a little)

Although ridiculously undervalued, the €8.3 offer for seismic specialist CGG shares from French oil & gas engineering company Technip is a reassuring signal, for several reasons.

Technip call on CGG is very opportunistic: it comes at a time when falling oil prices (-28% YTD for Brent) forces oil majors to cut on capex to preserve their cash-flow. On top of that, the seismic industry, where CGG has world leading positions, is structurally unbalanced with overcapacity in the offshore segment, less clients to pay for geological studies, and the need to restore profitability fast enough.

With CGG’s share price down 37% YTD, and more reassuring comments on its balance sheet following Q3 earnings release, Technip has tried to seize an additional know-how on the cheap. Its CEO, Thierry Pilenko, who’s described as an expert of seismic business (he was the CEO of Veritas), probably knows what he’s doing. And having new assets to restructure may be a good reason to ask for patience to his own investors, when the oil & gas business cycle is not in good shape.

But that’s no boon for CGG’s shareholders. It’s easy to show that their shares are deeply undervalued. Price to book value is 0.5x, which means that to the market, CGG is going to lose money for quite some time. Something logical looking at the state of the seismic market.

Other valuation ratios like EV/EBITDA give the same impression of trough valuation ratios affecting the shares right now.

Source: Factset

Source: Factset

But even if you take cautious financial forecasts into account and discount them at 9.8% using a DCF model, the current valuation of CGG share is around 12€, not 8€…

Coincidentally, BPI France (French State finance arm) owns 11.5% of CGG, valued at 12€ a share (valuation at end 2013 according to its annual report). They also own ~10% of Technip. So it’s difficult to imagine that the shareholder of the 2 companies accepts an offer that may potentially force it to realize a loss on one of its holdings (CGG) while losing value of the other (Technip) due to lack of synergies and the execution risk of such a takeover.

All those factors should buy some time to CGG’s shareholders. The company has a much less stressed balance sheet and a restructuring plan in place to withstand the current difficult environment. They should take advantage of it and their decision to slam the door to the face of Technip’s management was appropriate.

If the later want the door to reopen, they should just make a more convincing offer.

DISCLAIMER

The author of this article owns CGG shares.

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