SNC-Lavalin’s acquisition of WS Atkins will greatly expand its consulting, design and project management capabilities. It creates a $12.1 billion global engineering and construction services and project management company with 53,000 employees, significantly improves SNC-Lavalin’s overall margins and further balances its business portfolio.
Going forward, SNC-Lavalin Group’s share price (TSX—SNC) will reflect its $3.6 billion acquisition of British-based WS Atkins, and how well it executes the integration. SNC remains a buy for long-term share-price gains and decent, growing dividends. It remains what’s known as a ‘dividend aristocrat’.
SNC calls itself “one of the leading engineering and construction groups in the world and a major player in the ownership of infrastructure. From offices in over 50 countries . . . our teams provide engineering, procurement, construction, completions and commissioning services . . . in four industry sectors: oil and gas, mining and metallurgy, infrastructure and power.” It also offers “financing and operations and maintenance capabilities”.
Atkins “is one of the world’s most respected design, engineering and project consultancies . . . across the United Kingdom, North America, Middle East, Asia Pacific and Europe”.
Acquisition’s earnings will be immediately accretive
SNC expects Atkins to add to its earnings immediately. The earnings should grow even faster thanks to expected cost and revenue “synergies” of $120 million in the first full year after the acquisition closes. While there’s little overlap between the two companies, there’s still room to cut costs. For instance, SNC can cut Atkins’ corporate costs and stock-exchange listing fees, share services and offices, and streamline information technology systems, among others. At the same time, cross-selling services to each other’s customers could raise the combined company’s revenue and profit.
The acquisition should raise SNC’s earnings in another way. It says a lot of Atkins’ revenue generates relatively high profit margins. These include framework and master service agreements as well as fixed-fee consultancy and design projects. SNC expects to improve its overall profit margins.
Atkins also diversifies SNC’s business. This reduces its risk. Atkins increases SNC’s presence in the U.K., Scandinavia, the Middle East and Asia, in particular, as well as the United States. Geographically diversified revenue reduces SNC’s exposure to conditions in any one economy.
Atkins diversifies SNC’s global customer base. Troubles at any customer will not have an undue influence on SNC’s results. This lessens SNC’s dependence on any one customer and raises its bargaining power. Atkins also diversifies SNC’s service offering. For instance, SNC expects to secure “wider nuclear work, maintenance and decommissioning, in particular”. It also expects to win more rail and transit business.
A smart acquisition
SNC president and chief executive officer Neil Bruce said the “proposed acquisition is fully aligned with our growth strategy, creating a global fully integrated professional services and project management company—including capital investment, consulting design, engineering, construction, sustaining capital and operations and maintenance. By combining two highly complementary businesses, we will increase our depth and breadth of services to position us as a premier partner to public- and private-sector clients. It also creates new revenue growth opportunities in key geographies by positioning us to capitalize on increased cross-selling and the opportunity to win and deliver major projects in new regions.”
In 2016 Atkins generated revenue of £1.952 billion. That works out to C$3.374 billion. SNC expects the combined company to generate C$12.1 billion a year. Atkins generated adjusted EBITDA of C$312 million in 2016. (EBITDA, or Earnings Before Interest, Taxes, Depreciation and Amortization measures underlying earnings.)
How SNC will pay for this major acquisition
SNC can afford to pay for Atkins for a number of reasons. First, it has a strong balance sheet. On New Year’s Day, the company held cash and short-term investments of $1.093 billion. This exceeded total debt of $843 million. It will use its balance sheet strength to borrow £650 million, or about C$1.124 billion.
Second, provincial pension fund Caisse de dépôt et placement du Québec is supporting SNC’s bid. It will lend SNC $1.5 billion, connected to the company’s 16.77 per cent interest in electronic toll road Highway 407 in Ontario.
Third, the Caisse will also buy $400 million worth of subscription receipts that turn into shares. This will raise the Caisse’s stake in SNC. It remains the company’s top shareholder.
Fourth, SNC issued 15.55 million subscription receipts for the public to raise gross proceeds of $800 million. If the underwriters exercise the over-allotment option, the company would issue more receipts for further gross proceeds of $80 million.
SNC expects to maintain its investment-grade credit rating.
SNC writes that it has “a strong record of successful integrations, combining best practices from each organization and achieving synergy targets”. It expects the acquisition to close no later than October 27, 2017.
The consensus recommendation of four analysts is that SNC is a ‘buy’. We agree. It remains a buy for long-term share price gains and decent, growing dividends.
This is an edited version of an article that was originally published for subscribers in the May 2017/First Report of The MoneyLetter. You can profit from the award-winning advice subscribers receive regularly in The MoneyLetter.
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