SNC-Lavalin has made a 2,080 pence per share cash offer for London Stock Exchange-listed multidisciplinary consultancy, Atkins, giving a total price tag of £2.1 billion (US$2.6 billion/C$3.5 billion), and representing a 35% premium on Atkins’ share price based on its closing price at the end of last week. The deal, which is subject to various pre-conditions including due diligence, financing and approval by Atkins’ board, would create a 54,000-strong entity, with combined revenues of over US$11 billion.
It would significantly strengthen the Montreal-headquartered construction, engineering and environmental services firm’s presence in Europe and more vitally provide new openings outside of the oil & gas sector. It would also be the first M&A activity since CEO Neil Bruce took up the reins in October 2015 (Environment Analyst 17-Sep-15). The firm’s previous deals had included that of another UK-based firm, 14,500-strong oil & gas services provider Kentz Corp, which it acquired in mid-2014 for C$2 billion (£1.16 billion) just prior to the oil price collapse, its biggest purchase to-date.
The “possible offer” was confirmed on 3 April by Atkins in a press release, following volatility in its share price. It stated: “The board of Atkins has indicated to SNC-Lavalin that the possible offer would deliver value to Atkins shareholders at a level that the board would be prepared to recommend, subject to reaching agreement on the other terms and conditions of the offer.”
News of the bid by the Toronto-based firm comes just weeks after rumours of merger talks between Atkins and rival North American player CH2M (EA 31-Jan-17). CH2M was reported in the financial press to have contacted the British consultancy towards the end of last year to explore the possibility of a $4 billion deal, although neither firm commented on the veracity of the reports, one of which suggested CH2M’s overtures had been "rebuffed".
Soon after the CH2M rumours, Atkins CEO Uwe Krueger intimated during a third quarter trading update that a merger could be on the cards for Atkins given that the business had not yet reached an “optimal stage”.
Atkins’ strength in engineering, design and project management services for big construction projects, notably in transportation infrastructure, makes it an attractive target to SNC-Lavalin as it seeks to reduce its exposure to oil & gas in favour of lower risk sectors such as infrastructure and power. The latter has been quite open about its desire to make a major acquisition, ranging between C$1.5 billion and C$4 billion, whilst expanding its footprint in Europe and/or Asia was also a strategic priority. O&G impact
SNC-Lavalin has been hard hit by the downturn in the oil & gas markets in recent years, triggering an intense period of restructuring, lowering the global head count to 35,000 from a high of 42,000 following the Kentz acquisition in 2014 (EA 26-Nov-14). The realignment process saw the firm exit non-core businesses including its French and Monaco-based operations (EA 06-Jan-17), and its real estate facilities management business in Canada. In its most recent full-year results for 2016, the firm saw an 11.6% drop in revenue to C$8.5 billion whilst adjusted EBITDA fell 9.4% year-on-year to C$552 million (EA 08-Mar-17). Oil & gas accounted for 44% of SNC Lavalin’s revenue in 2016.
Atkins not been without its own difficulties of its own of late, with its Middle East and energy divisions in particular feeling the pinch of the global commodities slowdown (EA 29-Sep-16). However, the 18,000-strong firm posted revenues of $2.7 billion in its most recent financial year, representing a 6% rise year-on-year, boosted by an improving UK and European business. Operating profit rose 21% year-on-year to $206 million.
At a geographic level, the tie up would be highly complementary, with Europe representing just 5% of SNC-Lavalin’s revenues, against over half in North America, whilst in contrast, 49% of Atkins’ revenues are generated in the UK and Europe against 19% in North America. Twist in the tale
In a further twist to these latest events concerning consolidation in the consulting engineering sector, The Financial Times has reported that SNC-Lavalin was also in the running as a possible buyer of Amec Foster Wheeler, another London-listed player which three weeks ago accepted an ‘all-share’ offer from fellow oilfield and integrated support services firm, Wood Group (EA 13-Mar-17). The Wood deal, which values Amec FW at just over £2.2 billion has been unanimously recommended by both boards but is subject to a shareholder vote and anti-competition reviews. The Woods/Amec deal is at least in part too has had its fingers burnt by the collapse of the O&G sector, further compounded by a large acquisition just prior at the height of the super cycle, that of US engineering and downstream services provider Foster Wheeler (EA 20-Nov-14).
However, back on the Atkins/SNC-Lavalin deal, reports in the UK press also suggested that a third party could yet enter a counter offer, pointing to bidding wars in three recent consultancy sector transactions, namely Sweett, Parsons Brinckerhoff and Hyder, which ultimately went to Currie & Brown (EA 05-Jul-16), WSP (EA 06-Nov-14) and Arcadis (EA 20-Oct-14) respectively after fighting off rival bidders.
Founded in 1911, SNC-Lavalin offers engineering and construction services worldwide in 50 countries whilst Atkins, founded in 1938, has permanent operations in 23 countries globally.
Trading in Atkins shares on the London stock exchange surged 30% immediately after the announcement, and closed at £19.50 apiece, giving the firm a market capitalisation of £1.95 billion. Under UK takeover and mergers rules, SNC-Lavalin has until 1 May to confirm a firm intention to make an offer for Atkins. Both Atkins and SNC-Lavalin have warned that there is no guarantee of the deal’s completion, and the latter stressed that it reserves the right to make a lower offer depending on the circumstances.
The two firms are currently working together as partners in the Canadian National Energy Alliance (CNEA) consortium - also including Fluor and CH2M Hill - which is responsible for the management of the Canadian Nuclear Laboratories (CNL), Canada’s premier science and technology laboratory, having won a 10-year contract, valued at C$7 billion, in 2015.
Specialist environmental services offered by SNC-Lavalin include air quality, brownfield remediation, climate change and impact assessment, amongst others. Atkins’ c1,000-strong environmental consultancy business is managed alongside its water consulting engineering services offering a full range of disciplines. Wider implications
Atkins’ confirmation of SNC-Lavalin’s offer comes after another firm, Sydney-based WorleyParsons came in for criticism for failing to disclose, before rejecting, a takeover offer to shareholders from Middle Eastern Dar Group (EA 28-Feb-17). The latter then went on to take a majority shareholding in the Australian firm.
Canadian-based firms have been particularly active in terms of M&A in recent times as they seek to expand out of their domestic market which has been heavily impacted by the resources downturn. And the UK market is attracting attention, not least on account of the devaluation of sterling.
Last November saw UK’s Mouchel Consulting snapped up by another Toronto-based firm, WSP (EA 13-Oct-16).
WOR Price at posting:
$10.85 Sentiment: Buy Disclosure: Held
(20min delay)