COLUMN | Subsea7 and Saipem merger: culture will be as important as strategy as two offshore giants unite [Offshore Accounts]

On February 24, offshore construction heavyweights Saipem and Subsea7 announced that they had reached an “in principal” agreement to merge, having signed a memorandum of understanding to create a new Milan-headquartered organisation listed on the public markets in both Italy and Norway, which will be called Saipem7.

This would be an all-share deal, with Subsea7 shareholders receiving 6.688 Saipem shares for each Subsea7 share, representing a pro forma ownership of 50-50 of the combined company, a merger of equals.

Subsea7 will distribute to its shareholders an extraordinary dividend of €450 million (US$488 million) immediately prior to completion of the transaction, so that the ownership split is equal.

Unlike recent shipping transactions where bitter acrimony has erupted over proposed acquisitions (I am thinking especially of the battle for control of tanker operator Euronav between John Fredriksen’s Frontline and the Saverys family of Belgium, but also George Economou’s efforts to buy Genco Shipping last year), both the largest shareholders in Saipem and Subsea7 have expressed their strong support for the transaction.

It is important to note that both companies already have large, but not controlling, shareholders.

Who’s in charge?

The combined Saipem7 will be 12 per cent owned by Kristian Siem’s Siem Industries, which will nominate two of nine board directors, whilst Italian state energy company ENI will hold 11 per cent and Italian state investment fund CDP Equity six per cent, with four boards seats held by these two Italian shareholders, and the right to nominate the CEO.

The free float will be 71 per cent and there will be three independent directors. Saipem’s current CEO Alessandro Puliti is the nominated CEO of Saipem7 after the combination. The combined company will have a proprietary fleet of more than 60 construction vessels, and a global organisation of over 45,000 people.

There are still details to be negotiated, and it is expected that Saipem and Subsea7 will enter into a binding merger agreement around mid-2025, and completion is currently anticipated to occur in the second half of 2026.

Subsea7 will still exist under Saipem7

A separate legal entity fully owned by Saipem7 will run the offshore engineering and construction (E&C) business, including offshore wind. This will be operationally autonomous from its parent company and will be run under the leadership of John Evans, the current Chief Executive Officer of Subsea7.

It will operate under the brand name of (drum roll…) “Subsea7, a Saipem7 company.”

This expanded and combined Subsea7 division will be the key to the success of Saipem7. In 2024, the offshore E&C business lines of Subsea7 and Saipem accounted for around 70 per cent of the revenue and over 80 per cent of the combined earnings of the two companies, before interest, tax, depreciation and amortisation (EBITDA).

This is the business line where all of Subsea7’s offshore assets, from the 1,000-tonne crane DP construction vessel Seven Arctic to the pipelayer Seven Borealis to the rigid and flexible reel vessel Seven Navica, are deployed.

"Our fleets are very compatible," Subsea7’s CEO John Evans told analysts. "Subsea7 is primarily a reel-based pipeline company. Saipem is primarily a J-lay and S-lay fleet, so very complementary."

The jewels in Saipem’s construction fleet also work in this area, although its fleet is smaller than Subsea7’s but includes the massive 325m long DP3 Castorone, the craneship Saipem 7000 and the newly acquired JSD 6000 pipelayer.

Both companies have performed various windfarm installation projects, with varying degrees of success, and the merger will create additional scale here with which to compete with the Big Four Benelux integrated service providers, being Boskalis, DEME, Jan De Nul and Van Oord, as well as with Cadeler, the Danish jackup operator.

2024 was great for both companies

From a financial point of view, both Saipem and Subsea7 have returned to profitability, and both saw significantly improved results for the full year 2024 over 2023.

Full year Adjusted EBITDA at Subsea7 was US$1.09 billion, up 53 per cent on the prior year, and the company achieved robust free cash flow of US$408 million in the fourth quarter, leading to a reduction in net debt (including lease liabilities) of US$256 million compared to the third quarter. Fourth quarter net profit was US$26 million, and full year 2024 net profit was US$217 million.

Saipem achieved 2024 adjusted EBITDA of €1.3 billion (US$1.4 billion), up 44 per cent compared to 2023. Its net income in 2024 reached €306 million (US$332 million), an increase of 70 per cent compared to 2023, and for the fourth quarter the company’s net income was €100 million (US$110 million). Saipem generated €757 million (US$822 million) of free cash flow last year.

These are both large and successful companies. This is a merger of choice, not necessity or distress. This is not the Farstad-Solstad-Deep Sea Supply shotgun combination, with investors hoping three bricks tied together will float.

The Saipem7 merger will create a clear difference in size and resources between them and the smaller, often more specialised and now second tier contractors like McDermott, Allseas and Heerema, and regional players like Larsen and Toubro and Sapura Offshore.

Just as the DOF/Maersk Supply deal created a clear leader in light construction and ROV vessels, and the Cadeler/Eneti merger created a jackup windfarm installation leader, the new Saipem7 will lead the offshore engineering and construction industry.

What are the risks?

Peter Drucker, the management consultant and thinker, coined the adage that “culture eats strategy for breakfast,” meaning that a company’s culture and its shared values drive its performance as much as its strategy.

Most mergers and take-overs fail to achieve the benefits originally hoped for, not because awful secrets are uncovered after closing, but because bringing together two companies with different heritages, values and cultures is inherently difficult. Just ask anyone of the former staff of the companies gobbled up by Tidewater’s Pac-Man strategy how that has worked out for them.

The notorious example of German car-marker Daimler-Benz buying the troubled American car company Chrysler in 1998 stands out. In 2007, the deal was unwound and Daimler had to pay private equity house Cerberus US$650 million to take Chrysler and associated liabilities off its hands, and in 2009, Chrysler went into bankruptcy restructuring.

The big problem Daimler-Chrysler faced was the very different way of working between the two companies' German and American management teams, which led to trust breaking down between the Stuttgart and Detroit, as everything from decision making styles, pay policies to attitudes to quality and design were completely different.

The merger failed because of culture, not because there was no strategic logic for combining the two car companies or because it lacked investment or resources.

My biggest concern

And it must be said that this is the area where I have the biggest concerns about the success of the Saipem7 venture. Anyone who has ever worked with Saipem knows that it is very Italian in culture. Its largest customer is its shareholder, ENI, the majority of its senior managers are all Italian, and its headquarters is in Milan.

It is the epitome of the successful, engineering focused Italian company, whereas Subsea7 has a more international senior leadership team.

In Subsea7’s top team of eight, five nationalities are represented, but Britons are the largest group, including the CEO, CFO, Executive VPs of both Human Resources and Projects and Operations. The proposed structure of the new Subsea7 taking on Saipem’s E&C business, but operating autonomously under the Saipem7 CEO, potentially throws up the risk of potential conflict.

What happens when there is a dispute in the new Subsea7, which pits Italians against legacy Subsea7 staff? Will the Italian CEO of the parent company permit Mr Evans to run the E&C business independently?

Any merged entity has to make difficult decisions about promotions and the geography of offices and operations, and often such decisions become politicised and subject to interference from the board or from the sponsors of certain favoured staff.

Subsea7 has undertaken mergers before – in 2011 it acquired Acergy, the former Stolt Offshore, and it attempted to buy McDermott International for US$2 billion in 2018. Mr Siem has made no secret of his desire to consolidate the offshore construction segment further and is a prolific dealmaker.

Saipem has grown organically for 20 years

Saipem acquired Bouygues Offshore in 2002 for around US$1 billion, which explains its strong presence in Paris, but otherwise Saipem’s moves have mostly been organic. In 2022, it sold its land drilling business to KCA Deutag for around US$530 million and it has added both construction vessels and drilling rigs on a case by case basis through individual asset purchases rather than corporate transactions.

The trend continued last Friday when Saipem confirmed an extension of the bareboat charter of the drillship Deep Value Driller and a purchase option to buy the rig for US$300 million.

Culture of working together

But there are stark cultural differences between the way the two companies work and both their previous transactions were take-overs, not mergers. At the analysts’ briefing Mr Evans was keen to downplay such issues:

“We've worked together successfully on projects like Sakarya phase one and phase two in Turkey, in the SURF and conventional business, trunkline business, as well as Seagreen, in the offshore wind. So Sandro [Puliti], and myself and our teams have worked together over a number of years, and it's been a very good working relationship between us. We understand the complementary strengths that we bring.”

Technip and FMC married and then separated out

Offshore watchers are aware, however, that the merger of Technip and FMC Technologies in 2017 was supposed to create what was described as “the only fully-integrated subsea provider.”

However, within two years, the company announced it would be spinning out its liquefied natural gas (LNG), hydrogen and ethylene businesses as a separate listed company. In 2021, after a pause for Covid, TechnipFMC and Technip Energies become two separate entities in an effort to “unlock additional value.”

He's a glass half full kind of guy

Mr Evans was very bullish on being able to overcome the cultural differences in Saipem and Subsea7:

“I've always said we're much closer to each other than we both think in terms of how we look at it. We're fiercely proud engineers, project managers and offshore operators. We're fiercely proud of technology. We're technology geeks. We really do like technology and capability. And if you look at the history of our two companies, we've pushed the limits on what you can do in this industry for decades together.

"So, I think there's a high degree of respect between our employees in both our companies. And, so, I think when we bring these two companies together, I think, yes, we are different.  Anytime you bring any two companies together, you have to recognise the differences. But my view is a lot more about us that's aligned than misaligned.”

I like an optimist, and I admire Mr Evans’ positivity, but the nuts and bolts of the cultural differences will need resolving every day at every level of the merged entity. Grand statements of respect and admiration are to be expected from CEOs embarking on mergers. The successful implementation of the deal will be much harder.

Recall that ENI and the Italian state investment fund are both controlled by the Italian government, which has a mandate to create and protect employment in Italy, to support opportunities for Italian voters and to maximise revenue for the Italian state, including tax revenues. Mr Siem is a Norwegian billionaire with a desire to maximise his wealth and the return on his investments.

These ambitions may, at times, be hard to reconcile, especially as CDP and ENI have four of the nine board seats (44 per cent) with only 17 per cent of the shareholding in the company. That gives the Azzurri a disproportionate voice on the board.

Who loses?

The combination will undoubtedly be accompanied by job losses, as duplicated roles are removed from the combined company, separate systems are integrated, and facilities, functions and offices are rationalised.

Subsea7 and Saipem say that they expect to achieve annual savings of €300 million (US$324 million) in 2029 (the third year after the combination), a conveniently long way away, when such promises will no doubt be forgotten. However, inevitably some heads will roll, some jobs will be lost, and there will be retrenchments.

The group said in its investor presentation on the deal it is committed to four business lines, being offshore E&C (the merged Subsea7 business line), and Saipem’s existing onshore E&C business, its offshore drilling business of both jackups and deeper water assets, and an Italian sustainable infrastructures segment based around renewables, carbon capture and storage, blue and green fertilisers solutions and biofuels/sustainable aviation fuel manufacture.

That immediately leaves questions about the future of the existing Saipem floating production fleet and what happens to them.

Also, I have to wonder how long the relatively small, but capital-intensive sustainable infrastructures business will remain in the combined entity. As TechnipFMC found, these chemical and process business have very different economics to conventional offshore services businesses, and can be capital intensive.

In any take-over or merger or combination, there will be winners and losers. In the case of Saipem7, success will hang on the integration of two very different European corporate cultures.

There will be job losses and there will be divestments, but this deal is remarkable in the scale of the vision and the fact that two significant large shareholders are on-side, being two elements of the Italian state and a Norwegian entrepreneur, Mr Siem.

When Saipem7 faces challenges, the cultural fit between Mr Siem and the CEO of ENI will matter more than ever as Saipem bids arrivederci to its independence.

But, as the Italian proverb goes, “Chi dorme non piglia pesci” – "Those who sleep don’t catch fish."

We wish this multinational merger all the best.

Background reading

Saipem’s E&C contracting list of projects is here along with its 2024 results PowerPoint presentation.

Read the merger presentation and the analyst transcript.