How Costly Projects Are Forcing CH2M to Weigh a Buyout
Much damage was done by a couple of fixed-price contracts
When CH2M sold $300 million worth of stock in 2015 to private equity investor Apollo Global Management LLC, the company was in a weakened condition due to losses on fixed-price contracts. The terms of the preferred stock deal included Apollo’s right to elect up to two corporate directors. CH2M’s annual report for the year mentioned that the new investor may want to “exercise influence over us.”
In a July 19 note to investors, Andrew J. Wittmann, chief industry analyst at Baird Equity Research, says, “The terms of Apollo’s [roughly] 20% investment practically necessitates a transaction for CH2M over a fairly compressed time period.” His comment comes in response to recent unconfirmed reports of a potential deal for Dallas-based Jacobs Engineering to buy CH2M for about $1.5 billion.
CH2M may have sealed its own fate several years ago with a shift into fixed-price contracts that exposed the company to new risks.
Neither of the two U.S. design-construction giants would confirm the alleged link, first reported on July 19 in The Times of London. “We do not comment on rumors or speculation,” said Mendi D. Head, Jacobs global communications vice president. If it is negotiated and closed, the combination may be the biggest construction and engineering deal of the year.
Jacobs reported about $11 billion in 2016 revenue, and CH2M reported $5.2 billion.
CH2M may have sealed its own fate several years ago with a shift into fixed-price contracts that exposed the company to new risks. This ultimately resulted in “problem projects draining cash for several years, some of which continue to plague the company today,” says Wittmann.
Losses on those risks forced a search for new financing. The fixed-price projects contributed to about $351 million in net losses for CH2M from 2014 to 2016, say financial filings. The losses forced the company to negotiate with its lenders, exit fixed-price EPC markets, restructure and consider selling itself. CH2M’s share price fell during that time from $69 to $50, and its margins remained low.
Two problem projects stand out. One is a combined-cycle power project in Australia that is an element of the massive Ichthys LNG project that CH2M and its joint venture partner exited in 2016. In its annual report for 2014, CH2M booked losses of $140 million related to its portion of the project that contributed to a year-end loss of $319 million. CH2M blamed much of the booked loss on the project client and was reported to be seeking arbitration earlier this year.
Another problem project is a highway toll lane addition in Austin for the Central Texas Regional Mobility Authority, where the company experienced weather, staffing and site-condition issues that resulted in completion delays. These generated $121.3 million in extra costs in 2014, says CH2M’s quarterly report filed in May. The firm is seeking to recover much of its project losses.