LONDON Britain's Wood Group (WG.L) has formed a $1.1 billion joint venture with Europe's largest engineering company, Siemens AG (SIEGn.DE), to provide services for gas turbines, aiming to strengthen a division that has been hit by project delays.
Wood Group, which designs, builds and maintains oil and gas facilities and pipelines, has found it difficult to compete with companies that manufacture their own gas turbines since it is paid lump sums for contracts and risks squeezed margins if the work is delayed or costs overrun.
By teaming up with Siemens, the Aberdeen-based engineer hopes to boost the division's competitiveness.
"The risk profile in our project group within gas turbine services was too high with large lump-sum projects," Bob Keiller, chief executive of Wood Group, told analysts on a conference call.
Keiller said the joint venture was the "best option" and offered more long-term value for shareholders than a direct sale.
The Siemens and Wood Group units have combined assets of $1.1 billion. The joint venture is expected to deliver annual cost savings to Wood Group of around $15 million within three years. Margins should improve but revenue will be lower next year.
"We do believe that structurally the Siemens business will have a higher margin potential," Keiller said.
Siemens, which will have 49 percent of the joint venture, said the venture would enhance the position of both companies in a growing market for gas turbine services.
"This looks like a sensible move for a division that at times struggles to compete against the original equipment manufacturers," analysts at Oriel Securities said in a note.
The head of Wood Group's gas turbines division, Mark Dobler, will transfer to and lead the joint venture.
(Reporting by Stephen Eisenhammer; editing by Kate Holton and Louise Heavens)