Consolidation in Engineering & Construction Market Continues

AECOM Technology Corporation (NYSE: ACM), a couple of weeks ago, announced that it will acquire a similar sized rival, URS Corporation (NYSE: URS).  URS shareholders will receive $56.31 per share, $33 of which will be in cash and the remainder in AECOM stock.  The per share purchase price is 19% higher than the trailing 30-day average closing price of URS shares ending July 11, 2014.  However, URS stock traded as low as $42.51 only five months ago, which would equal a 33% premium.  AECOM will assume URS’ debt outstanding, pushing the total enterprise value of the transaction to approximately $6 billion, which equals 8.5x URS’ 2014E EBITDA.  The deal combines two major competitors in the industry to create the second largest E&C firm in the U.S. behind Fluor. 

We believe the transaction is both financially and strategically wise for AECOM.  AECOM is moderately levered (slightly higher than 1.0x Net Debt /EBITDA) and its stock is trading 100+% higher than it did two years ago.  In a low interest rate environment, the combination of these two factors create a very tantalizing war chest to pursue transformational acquisitions.  Strategically, URS adds scale and a strong presence in energy to AECOM, which is typically more known for its strengths in design and program management for buildings, transportation systems, and the education sector.  As we mentioned in previous postings the global energy market is rapidly evolving and creating opportunities for businesses that cater to this industry.  While scale is important to drive profitability for E&C companies, which are typically known for razor thin gross margins, we strongly believe the primary strategic driver for AECOM to make this bold move is acquiring share in the energy market, particularly in the US where URS generates over 70% of its revenues.  Based on our ongoing discussions with leading professional services firms,  we are confident the energy sector will experience a significant uptick in M&A activity over the next 18 months.  We see interest in the sector from a broad set of companies that provide technology solutions, professional services, data analysis and business intelligence.