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Martin M. Koffel, the chief executive and chairman of URS Corp., had been set to retire at the end of last year but his directors convinced him to stay on.
Good thing that they did. The British-born financial expert, about whom little is known except for his love of horseback riding in the western U.S., had another company to round up: Washington Group International. On May 28 the two firms announced that URS Corp. would acquire WGI for $2.6 billion in cash and stock.
WGI shareholders will receive a substantial premium when the deal, of which 55% will be paid for in cash, closes as expected later this year.
Among the shareholders is Dennis Washington, WGI’s chairman and one of the wealthiest men in the U.S., who also is known for a rough-and-tumble rise from humble beginnings. He learned how to round up companies in the western U.S, too. His best known construction deal is the acquisition of Morrison Knudsen Corp. out of bankruptcy in 1996 into which he combined his own company under his name. Dennis Washington beneficially owns or has options for about 3.2 million shares of WGI. It isn’t clear if the two men have met in putting together the new transaction, but Koffel’s brand is all over this deal.
He could not have moved at a more fortunate time for either company. Engineering and construction has been enjoying a honeymoon on Wall Street recently, especially companies involved in the attractive power and defense sectors. AECOM Technology Corp. last month raised about $480 million in one of the biggest initial public offerings of stock of the year.
Debt financing is cheap and plentiful, too. The price that URS is paying for WGI is impressive evidence of low-cost debt financing, says Andrej Avelini, vice president of EFCG Inc., a New York City-based management and merger and acquisitions consultant. “The valuation is incredible,” he says. “WGI is trading at 24 times after-tax earnings. URS is paying 15% premium over that.”
The combined companies will have $8 billion in revenue, roughly “the size of a Jacobs [Engineering],” says Avelini. “It changes the competitive dynamics.”
So far Koffel apparently has been able to integrate his acquisitions, although not always as fast as some would like, and hire new staff to do all the work the company has been winning. He’s also been able to pay down the considerable debt that URS has had at different times to finance its acquisitions.
URS will have $1.5 billion in debt after the deal closes, but the company had $1 billion after acquiring EG&G in 2002. That debt was substantially paid off and URS notes in its presentation that it has had prior success in “deleveraging.”
WGI had net income of $81 million on $3.4 billion in revenue in 2006; URS had net income of $113 million on $4.2 billion in revenue.
Koffel says the combined companies will be able to take advantage of infrastructure investment, emissions reduction work and outsourcing by the federal government. Clients are demanding “a single firm that can provide the full range of construction services” for large, complex projects, he says.
The buying began in 1996 with Greiner Engineering and in 1997 with Woodward-Clyde. It continued in 1999 with Dames & Moore Group. In 2002 EG&G was purchased, putting URS in the federal operations and maintenance market.
Hugh Rice, chairman of investment banker and consultant FMI, says he expect more consolidation at the large end of the engineering and construction market. “To be a global player, you have to have a global footprint, scale to do large projects, and diversification to react to changing markets,” he says.
WGI’s earnings were down since the company wound up its work in Iraq, a story that had captivated Wall Street before the insurgency gained momentum. But WGI was profitable and reported earnings for 2006 in line with its estimates. The company’s stock ticked steadily higher this year, and since mid-March has climbed from the mid 50s to more than 70 a share in May. Exactly what drove the higher price isn’t clear. There was substantial short interest in the company’s stock, too, almost 10% of all shares, according to Schaeffer’s Investment Research.
