Morgan Stanley has promoted Subsea 7 to its Top Pick in European energy services following a decisive regulatory outcome in Brazil. CADE - Brazil’s Administrative Council for Economic Defense - approved the proposed merger between Subsea 7 and Saipem on the evening of June 23 and did so without imposing any remedies, a result Morgan Stanley described as quicker and more favourable than expected.
The brokerage replaced SBM Offshore NV with Subsea 7 as its preferred stock in the sector after identifying CADE as "the single biggest hurdle to deal completion." Brazil had been singled out because it is the jurisdiction where the two companies’ activities overlap materially.
Market movements were modest on the announcement. Saipem shares were last reported up 0.18% at 84.5310 as of 06:58 ET (10:58 GMT), while Subsea 7 was up 1.23% at NOK 347. Morgan Stanley said it expects the market to "now start to better price deal completion" and anticipates positive performance for both stocks as that process unfolds.
Although CADE's approval removes a major regulatory impediment, the path to closing the transaction still carries conditions. Morgan Stanley reiterated that deal completion is currently guided for the second half of 2026. It also noted that interested parties in Brazil, including Petrobras, retain the right to appeal CADE's decision.
Before the approval, consensus among market participants had leaned toward eventual clearance but with an expectation of some form of light remedy. Analysts had considered measures such as increased transparency in bidding or mandates to grant leases to the lowest bidders in Brazil without looking for divestments. Morgan Stanley had previously anticipated that CADE's decision deadline could stretch to early November and that approval might still take additional months; the agency's faster-than-expected sign-off altered that timeline.
On valuation grounds, Morgan Stanley highlighted that Subsea 7 still trades at roughly a 5% discount relative to Saipem's shares on a relative basis. That relative valuation gap formed a key part of the case for naming Subsea 7 as the new Top Pick.
The brokerage identified several investment drivers for Subsea 7 going forward: an increased pipeline of offshore energy projects, new contract awards, potential improvements in EBITDA margins, and the strategic benefits of the planned merger with Saipem. These factors underpinned Morgan Stanley's view of upside for the combined franchise.
At the same time, the bank flagged downside scenarios that could weigh on returns. Explicitly cited risks include downward revisions to earnings estimates, a general downturn in the energy project environment, potential cost overruns, and execution setbacks on projects. Another listed risk is the possibility that market participants remain unconvinced about the merger's benefits despite regulatory clearance. Morgan Stanley noted that the merger was first announced in February 2025.
Key takeaways
- Morgan Stanley elevated Subsea 7 to Top Pick after CADE approved the Subsea 7-Saipem merger without remedies on June 23.
- Both Subsea 7 and Saipem shares ticked higher on the news; the bank expects markets to reprice the odds of deal completion ahead of a target close in H2 2026.
- Sectors affected include offshore energy services, oilfield engineering contractors, and the broader energy project supply chain.
Risks and uncertainties
- Parties in Brazil, including Petrobras, can still appeal CADE's decision - a legal route that could affect timing or terms.
- Downside pressures such as earnings downgrades, a weaker energy project environment, cost overruns, or project execution problems could hurt valuations in the sector.
- Market skepticism over whether the merger will deliver expected synergies could limit upside for the combined entity.