Samsung Heavy Industries rejects acquisition plans of Ezra

Will it completely abandon its subsea venture?

According to CIMB, industry sources have reported that Samsung Heavy Industries (SHI) has failed to obtain its management’s approval for an acquisition of Ezra to spearhead SHI’s new thrust into subsea.

Here's more:

SHI started to look at M&As in the subsea business from 2011, to diversify away from the crowded commercial shipbuilding and offshore business. Ezra was one of its targets.

We are doubtful of Ezra’s traction in subsea, both in winning sizeable orders and profitability, which may be de-rating catalysts for our intact Underperform rating. 

What Happened
Industry sources have reported that SHI’s Future Strategy Team has rejected plans for the group to acquire Ezra Holdings, as part of the group’s venture into the subsea segment.

SHI has been planning for a sizeable M&A in the subsea business for two years, to diversify from the crowded commercial shipbuilding and its constrained capacity. However, there are not that many M&A targets in this space.

Apart from Ezra, SHI had looked at other subsea companies based in the Netherlands and Switzerland. In contrast, HHI is venturing into the subsea business with its in-house subsea R&D resources, targeting commercial shipments by 2H14.

What We Think
Ezra’s subsea division had lost money in 3QFY13 with Ezra having to write off costs from project delays due to client rescheduling and cost overruns for some.

A lack of project baseload meant the group could not afford any major timeline shifts in project execution due to its high overheads andsubcontractor costs.

4Q13 should be profitable following the completion of some projects but we are worried about low vessel utilisation during winter (Nov-Jan), which could eat into subsea’s profitability in 1Q14.