Is Wood Group right to reject Apollo Management acquisition bid?

Private Equity companies are still interested in buying UK companies, which they believe are significantly undervalued. In 2022, an American PE firm acquired Morrisson’s while Parker-Hannifin bought Meggit in a £6.3 billion deal. Now, Wood Group (LON: WG), the engineering and consulting company, has rejected an offer from Apollo Management. 

Wood Group rejects Apollo offer

Wood Group is a FTSE-250 company that provides engineering solutions mostly in the energy sector. Its business is divided into consulting, projects, and operations. In the past few years, the company has benefited substantially from long-term contracts from the likes of BP (LON: BP) and Shell. It also serves other oil and gas companies. 

In a statement, the company said that it had rejected three offers from Apollo Global Management, the giant PE firm with over $512 billion in assets. The final offer came in at 230p per share, which is much higher than the closing price of about 154p. Wood Group believes that the offer substantially undervalues the company.

The management hopes that its growing business will push its stock price much higher in the long term. At its peak, Wood Group share price was trading at 785p, meaning that it has plunged by more than 80%. As such, the management could be having recency bias since they believe that the stock could crawl back.

In January, Wood Group published its trading statement. The results showed that the company’s revenue came in at $5.4 billion for the full year. These results were driven by its consulting and operations and offset by projects. Its order book rose to $6 billion while its adjusted EBITDA will be about $375 million and $385 million.

Apollo Group’s offer values the company at £1.9 billion, giving it a price-to-EBITDA ratio of 4.9x, which seems a bit reasonable. The company currently has a PE ratio of 10, according to data by Hargreaves Lansdown. 

Wood Group share price forecast

WG. chart by TradingView

Conducting a technical analysis on Wood Group stock, for now, is a bit difficult because of the potential for a bidding war. Turning to the daily chart, we see that the stock formed a double-bottom pattern at 101.20 this month. This was an important price since it was also the lowest point on March 2 2020 and in July 2004. 

The neckline of the double-bottom pattern is at 365.15, which is about 130% above the current level. It remains below all moving averages. Therefore, from a technical standpoint, it seems like the management is right to reject the offer. In most periods, a double-bottom pattern is usually a bullish sign. However, a clean break below the support at 100p will signal that bears have prevailed and that the bearish trend will continue.