AECOM's $6-billion offer to buy URS Corp., in cash, stock and assumed debt, would keep the firm intact but some were surprised it became the acquired instead of the acquisitor.
Some who speculated earlier that URS might sell one of its units now wonder if the deal’s announced $250 million in cost synergies is too conservative and how the firms will handle sectors with major overlap, such as transportation and civil works.
“On paper, economics are undeniably attractive, and we would not be surprised to see shares trickle higher,” said Andrew Wittman, construction-sector research analyst for investment firm Robert W. Baird, in a July 21 report. “Longer term, we cite challenges in integrating two large professional firms, unprecedented in the industry.” He also foresees a challenge in organic growth, projecting that AECOM sales will have to exceed $350 million per week at its new size.
AECOM also is in talks to acquire Hunt Construction Group Inc., according to several industry sources with knowledge of the discussions but who are not directly involved or authorized to speak publicly. An AECOM spokesman declined on July 22 to confirm any discussion.
AECOM and URS said their deal, announced on July 13 and set to close in October, would create the latest global giant, with new capacity in oil-and-gas, power and government services, more than $19 billion in revenue and 95,000 employees in 150 countries. It would also offer URS more opportunities to work internationally.
URS Chairman and CEO Martin Koffel said leadership has the “talent to conceive of and execute” the enlarged firm.
The proposed purchase comes four months after URS agreed to an activist investor's demand for a reshaped board and new strategic options to boost its share price.
“This combination creates an industry leader with the ability to deliver more capabilities from a broad global platform,” said Michael S. Burke, AECOM CEO since last December. Burke, who will be CEO of the combined firm, did not identify which staff from the two firms would comprise its new operating management or specify their roles.
Burke told ENR in a July 14 videotaped interview that he met with Koffel in March, as the firm was announcing an agreement with key shareholder Jana Partners to find ways to boost company value.
"We had been looking at URS for awhile, but quickly concluded that the two organizations were more complimentary than we had thought," said Burke.
In a July 14 conference call with investors and analysts, Burke termed the transaction "a transformational milestone" for AECOM that will boost its ability to "compete for and deliver on integrated services contracts." Most of URS' services are "complimentary" to AECOM, he added.
The $56.31-per-share price is about 19% more than URS' 30-day average closing price. The cash-and-stock portion of the acquisition offer is $4 billion. URS shares closed 12% higher at $58.55 at the close of trading on July 22.
"I believe the Street had thought that AECOM would be one of the logical acquirers," said Maxim Sytchev, managing director and head of research at Dundee Capital Markets, Toronto. AECOM (NYSE: ACM) rose to $35.37 at trading close on July 22.
Andrej Avelini, managing director of industry M&A broker and financial consultant EFCG, estimated the transaction valuation at eight times earnings before interest, taxes, depreciation and amortization (EBITDA). He said that multiple was about the median for recent sector deals "but a bit low" compared to the still-pending major purchases of U.K. contractor Kentz by Canada-based SNC-Lavalin and Foster Wheeler by U.K.-based AMEC. Both are about 10 times the EBITDA, he said.
"This is a rather large deal for AECOM to pull off relative to its history," said Jamie Cook, Credit Suisse sector lead analyst, in a July 13 note. While acknowledging the firm's estimated $250 million in cost synergies, "we fail to see revenue synergy opportunities."
She added, "While scale is becoming increasingly important in the E&C industry, scale matters most in oil and gas and power, where the combined company is still insignificant versus its peers."
Koffel told analysts on the July 14 call that AECOM has $2 billion in construction work through its Tishman Construction unit, acquired in 2010, and that URS offers construction "as a service. We never purported to be a construction firm."
According to Burke, the combined firm "will get bigger over time" but not immediately, as it focuses on debt paydown.
Burke said that more clients are seeking integrated services, which the combined firm can provide. He noted that about 40% of global water projects are design-build, up from 10% just a decade ago.
"We will have some clients who want integrated services and some who don't. We want to offer both and be agile," said Burke.
Related to Hunt, one source told ENR that talks had been ongoing for at least a year, that the offer could reach $100 million and that it could be announced within weeks.
Burke says that while the combined AECOM-URS may not compete directly with large firms such as Fluor, CB&I on large-scale work in the O&G and energy sector, he sees many opportunities to design and build "enabling infrastructure" for projects such as ports and rail.