By Stephen Jewkes and Karolin Schaps
LONDON/MILAN (Reuters) - Italian oil contractor Saipem (SPMI.MI) is asking investors to pump in fresh capital equivalent to its current market value to help it to weather the oil service recession and plot a path to recovery as main investor Eni (ENI.MI) takes a step back.
Saipem (SPMI.MI), which is 43 percent owned by Eni, said on Wednesday that it would hold a 3.5 billion euro (3 billion pound) rights issue in the first quarter of next year as part of a new four-year turnaround plan aimed at ensuring the company's survival without its Eni safety net.
At the same time Eni said it had agreed to sell about 12.5 percent of its Saipem stake to state-owned investment fund Fondo Strategico Italiano (FSI). That deal, in conjunction with a shareholder pact with FSI, will see Eni relinquish its control and cut 5.1 billion euros of debt from its balance sheet.
State-controlled Eni, the A- credit rating of which had previously helped Saipem to service its debt, is looking to focus on its bread-and-butter business of finding oil and gas and is keen to get its subsidiary on a standalone footing.
Saipem, which has now been given a Baa3 investment grade rating by Moody's, said the 3.2 billion euros of gross debt remaining after the rights issue would be refinanced by new credit lines.
"We are ready to go it alone. I think there's always a good time in the history of a company for step change. This is certainly a major change," Saipem Chief Executive Stefano Cao told Reuters.
With margins and orders battered by low oil prices, Saipem needs a large capital injection to get the group back on its feet. It has issued two profit warnings in a little more than 30 months and in July announced cost cuts including 8,800 redundancies.
Saipem, which expects the market to recover in 2017, said it had expanded a previous cost savings target of 1.3 billion euros to 1.5 billion euros and is ready to dispose of non-core assets to lift its profit margins.
At 0928 GMT Saipem shares were up 10 percent, with Eni gaining 1 percent.
Goldman Sachs (GS.N) said that the rights issue would address the key concern over debt and further restructuring measures would improve profitability.
"We think the (Saipem) management's new strategic plan will establish it as a leading diversified services company," the U.S. bank said.
Saipem, which is embroiled in a corruption case surrounding its business in Algeria, has been hit hard by a series of low-margin legacy contracts that have undermined profit margins.
After making massive writedowns in the second quarter as part of a clean-up drive, it is forecasting a net loss this year of 800 million euros.
Bernstein analyst Nicholas Green said he had expected a bigger cleanout and more detail on how Saipem intended to make itself viable in the difficult market conditions.
"The rights issue was good news, since it was bigger than expected, but it will only happen next year and that means dragging out the pain and suffering for another four months or so," he said.
(Additional reporting by Agnieszka Flak and Giancarlo Navach; Editing by David Goodman)