In a cross-border acquisition that many in the global engineering sector had been anticipating in recent weeks, Pasadena-based Jacobs Engineering Group Inc. announced Sept. 8 that it has reached agreement to buy Australian design firm Sinclair Knight Merz for about $1.2 billion.

The deal is set to boost Jacobs' role in mining and infrastructure markets in Australia and elsewhere, and would provide SKM with a link to a well-heeled parent in diverse industrial, government and transportation technical services businesses.

Analyst Andrew Wittman of Baird Equity Research said in a report last month that an acquisition announcement "will be viewed as in line with [Jacobs'] strategic focus," since the firm "has historically driven one-third of earnings-per-share growth from M&A."

 

Martin

The transaction, subject to a shareholder vote by employee-owned SKM and to Australian government approval, is set to close during the first quarter of Jacobs' fiscal 2014, which ends on Dec. 31, 2013.

The firms did not provide details on financing, but Jamie Cook, lead engineering-construction sector analyst at Credit Suisse, speculates that Jacobs could fund about $336 million of the total in cash, and the rest in issued debt. She adds that the purchase price is comparable to valuations used in the recent large purchases by CB&I of Shaw Group and by URS Corp. of Flint Energy.

Jacobs reported 2012 revenue of nearly $11 billion in engineering, construction, and operations and maintenance. It ranks fourth on ENR's list of the Top 150 Global Design Firms, with $4.96 billion in global engineering revenue; all but $2.23 billion is U.S.-based.

SKM, which has 6,500 employees in 40 worldwide offices, ranks at No. 25 on the top global design list, with $1.47 billion in worldwide engineering revenue, of which all but $419.5 million is in Australia. The firm noted that 18% of revenue was in transportation, with about an equal proportion split between power and industrial sectors.

According to a Credit Suisse analysis of company data and the investment bank's own estimates, about 62% of Jacobs' revenue is from the U.S. and only 2% from Australia, while 54% of SKM revenue is based domestically and only 6% in the Americas.

 

Rizzuto

The investment firm adds that Jacobs derives about 5% of revenue in mining and metals work, while that sector generates nearly 40% of work for SKM. CEO and Managing Director Santo Rizzuto told ENR in a 2011 interview that the firm has worked for Australian mining giant Rio Tinto for more than three decades.

There is speculation on the future of Australia's mining sector. But Maxim Sytchev, an engineering, construction and industrial sector analyst with Dundee Capital Markets Research, Toronto, noted on Sept. 3, that "with Jacobs making a bet on that geography, investors are bound to conclude that the Chinese-Australian slowdown might be seeing its last inning."

SKM's search for "strategic" growth options, which dates to 2009, has included entertaining an acquisition. Firms that are believed to have had M&A discussions with the firm include France's Technip, U.K.-based AMEC, Australian competitor WorleyParsons, Houston-based KBR and SAIC, McLean, Va., according to analyst and press reports.

SKM's Rizzuto said, in a statement, that the acquisition "uniquely positions us among our global peers and opens the way for us to achieve even greater things in the future. It adds scale, diversification and growth opportunities to our business."

The firm may also consider more EPC work and "broadening its risk a little," he told ENR in 2011.

Neither firm disclosed details on any possible layoffs or on a new title or role for Rizzuto.

Craig Martin, Jacobs president and CEO, noted compatible cultures and operating philosophies between the firms. "Our capabilities and geographies have little overlap," he said in a statement.

The firm announced in July two new Australian contract awards—as contract delivery manager on the $3.6-billion NorthWest Rail Link project in Sydney, one of the country's largest infrastructure projects, and as early-stage engineer on a pigment plant project for titanium manufacturer Tronox in western Australia. Neither the contract nor project value was disclosed.

SKM announced last month an agreement with the World Bank in which it avoided debarment over inappropriate payments on a bank-financed project in Asia because it reported the incident to bank officials last year and expanded its ethics program.