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AECOM's $6 Billion Offer for URS Keeps the Company Whole

By Debra K. Rubin
This article first appeared on ENR.
July 14, 2014

Four months after URS agreed to an activist investor's demand for a reshaped board and new strategic options to boost its share price, the firm is set to be acquired by AECOM. The deal, worth about $6 billion in cash, stock, and assumed debt, would keep URS intact. The firms, which announced the transaction on July 13, said it would create the latest global giant, particularly in oil, gas, power, and government services, with more than $19 billion in revenue and 95,000 employees in 150 countries.

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The $56.31 per share price is about 19 percent more than URS's 30-day average closing price, and 8.2 percent more than its $52.02 closing price (NYSE:URS) on July 11. The cash and stock portion of the acquisition offer is $4 billion. "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. The firm (NYSE: ACM) closed at $31.76 on July 11.

There was speculation that URS was considering options that might involve a breakup of the corporation's business units. “This combination creates an industry leader with the ability to deliver more capabilities from a broad global platform,” said Michael S. Burke, AECOM's CEO since last December. The firms said Burke will be CEO of the combined company, which will have a "new operating management structure" from both companies.

There also was speculation the firm might have a new name when the deal is completed. In a July 14 conference call, Burke termed the transaction "a transformational milestone" for AECOM that will boost its ability to "compete for and deliver on integrated services contracts." He added that most of URS's services are "complimentary" to AECOM. "This is a rather large deal for AECOM to pull off relative to its history," said Credit Suisse sector lead analyst Jamie Cook 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 that "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."

The firms' executives did not expect to immediately ramp up construction capabilities to become competitive with firms such as Fluor and CB&I on megaprojects such as in oil and gas. Koffel told analysts on the July 14 call that AECOM has $2 billion in construction work through Tishman, 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, however, that more clients are seeking integrated services, which the combined firm can provide. He noted that about 40 percent of global water projects are design-build, up from 10 percent just a decade ago. "We will have some clients who want integrated and some who don't; we want to offer both and be agile," said Burke.

He added that he did not anticipate any problems with projects or clients because of the transaction, or any significant antitrust issues. He noted required filings in just three countries, adding that the industry's top five firms have just 20 percent of the total market. The firms are expected to integrate quickly. An already developed organization chart is "evidence" of that.

While observers say URS has been more adept at integration, Burke emphasized the firms' "extensive integration experience." Koffel added that leadership has the "talent to conceive of and execute" a 95,000-person organization. AECOM will elect two URS board members to its board but the firms did not identify any current role for URS Chairman and CEO Martin M. Koffel, who is set to step down from this year, nor did they specify the highest-ranking URS executive name and title in the new combined firms' organization.

According to a source close to the transaction, Randall Wotring, president of URS's federal business, will lead the combined firms' work in the federal sector. The source also speculated that Koffel may have some role in company operations "for a year or two." John M. Dionisio, AECOM executive chairman, will be the combined firm chairman.

In a statement, the two firms' said they "are complementary, and our cultures are highly compatible," and noted employee benefits "as the organization integrates its leadership talent and capitalizes on its greater scale to ... compete globally.” The transaction, set for completion in October, would link the industry's first and third largest global engineers. AECOM ranks at number 1 on ENR's list of the Top 500 Design Firms, with $7.2 billion in global revenue; URS ranks at number 3 with $5.27 billion. URS also ranks at number 16 on ENR's list of the Top 400 Contractors, with $4 billion in global construction revenue. AECOM ranks at number 6 on ENR's list of the Top Construction Management for Fee companies, with $912 million in 2013 revenue. The firm acquired Tishman Construction Corp. in July 2010 for $245 million to boost its construction market position.

The companies said URS stockholders "will receive per share consideration equal to $33.00 in cash and 0.734 shares of AECOM common stock for each URS share and will own 35 percent of the combined company when the deal is completed." Both company boards have unanimously approved the agreement, the firms said, adding that the combined company would be located in Los Angeles, where AECOM has its corporate headquarters. It also will maintain "a key operational presence" in San Francisco, where URS is based, the firms noted. AECOM, which will release third-quarter results on August 5, said it "continues to target diluted earnings per share (EPS) in the lower end of its range of $2.50 to $2.60 for fiscal 2014, excluding transaction-related costs."

But backlog, which AECOM said was $30 billion for the combined firms, remains at record levels. URS, which has been under pressure from activist investor Jana Partners to enhance shareholder value, had hired Citigroup and DBO Partners to contact potential buyers, according to a July 11 Reuters story that said some private equity firms had "passed" on the deal. According to the transaction source, the private equity offer was not financially acceptable to URS nor did it offer any synergy. AECOM was one of URS's competitors cited, along with Fluor Corp., Jacobs Engineering, CB&I, and Tetra Tech, although Reuters did not say if any of the other firms also had made offers.

Paul Zofnass, president of industry M&A broker and financial consultant EFCG said: "To me it was the obvious play. Here are two firms, each of whom have been pursuing the same strategy for the past 25 years, to become the biggest player" in the engineering sector. "What could make more sense than for them to ultimately merge with each other." He added that the deal could create opportunities for smaller and mid-size firms, "who have made it part of their policy to hire away from the consolidators." Added Zofnass, "this merger should make for good hunting."

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