March 21 (Bloomberg) -- Actividades de Construccion & Servicios SA, Spain's biggest construction company, bought a 25 percent stake in German rival Hochtief AG for 1.26 billion euros ($1.7 billion), reducing its reliance on a slowing domestic market.

ACS purchased the holding from August von Finck, Hochtief's largest investor, for 72 euros a share, it said in a statement today. That's 35 percent more than Hochtief's close on Dec. 20, the day von Finck first said he might sell. The Madrid-based company said it has no immediate plans to increase the stake.

Hochtief stock has surged 43 percent in the past six months on speculation that Germany's biggest builder might be a takeover target. Analysts said ACS's investment may lead to a full bid as Essen-based Hochtief benefits from a rebound in German construction and burgeoning profit at units overseas.

``ACS is not the worst solution for Hochtief,'' said Marc Nettelbeck, a Stuttgart-based analyst at Landesbank Baden- Wuerttemberg with a ``buy'' rating on the stock. ``Financial investors would rather fillet the company, but ACS is similar in size to Hochtief and may be interested in the whole group.''

Shares of Hochtief fell 1.25 euros, or 1.8 percent, to 69.51 euros for a value of 4.87 billion euros. Madrid-based Actividades de Construccion closed little changed at 44.10 euros. The company has a market value of 15.6 billion euros, making it the world's third-biggest builder by that measure, after Vinci SA and Bouygues SA of France.

Hochtief and ACS are more closely matched by sales. The Spanish company had revenue of 14 billion euros last year, compared with a figure of 13.7 billion at Hochtief in 2005.

Consolidation Talk

Hochtief stock added 4.3 percent yesterday amid speculation that ACS might bid. Other European construction stocks also rose, led by Vinci and Sweden's Skanska AB, the world's fourth- biggest builder, amid talk of impending consolidation.

While Vinci and Skanska were little changed today, Eiffage SA, the third-biggest builder in France, rose the most in nine months as ACS's move for Hochtief encouraged speculation that another Spanish contractor, Sacyr Vallehermoso SA, may bid for shares of the company it doesn't own. Sacyr has a 32 percent stake.

Hochtief's earnings are picking up as German construction spending recovers from a decade-long decline. It may also be attractive for its Australian division, Leighton Holdings Ltd., and Turner Corp., based in New York. The company, which posts full-year profit figures tomorrow, gets 42 percent of sales from the Americas, 39 percent from the Asia Pacific and 13 percent from Europe. Spain provides 84 percent of ACS's revenue.

International Ambitions

``The transaction will give ACS a platform to accelerate its international expansion,'' the Spanish company said in its statement. There is ``great potential'' to expand Hochtief and increase its profitability, the statement said. ACS said there are currently no plans to increase the holding.

The investment in Hochtief continues a trend for Spanish builders to look beyond the domestic construction industry as they seek to invest record profits from a building boom that may peter out with the completion of infrastructure projects and a slowdown in the local housing market.

Spanish construction spending will probably grow by 4 or 5 percent this year, decelerating from 6 percent in 2006, trade group Seopan said on March 6. Growth last slowed in 2003. The contribution of European Union, responsible for a quarter of Spanish infrastructure investments in the past decade, will decline, Seopan said.

All-told, Spanish companies have spent more than $280 billion on mergers and acquisitions during the past three years, according to data combined by Bloomberg, led by phone operator Telefonica SA's 18 billion-pound ($35 billion) purchase of O2 Plc. Grupo Ferrovial SA, Spain's second-biggest builder, spent $19 billion on U.K. airport operator BAA Plc.

`Stable Structure'

``There has been a lot of speculation and we are pleased that we again have a stable shareholder structure,'' Hochtief spokesman Christian Gerhardus said by telephone. ``We will shortly hold talks with our new investor to solve all remaining questions. ACS has said the holding will not be increased and Hochtief will remain an independent business.''

Hochtief's future chief executive officer, Herbert Luetkestratkoetter, who takes over on April 1, said prior to today's announcement that the company's divisions are closely integrated and that it should be allowed to remain intact.

``A breakup would be absolutely value-destroying,'' Luetkestratkoetter said in an interview given on March 8 and embargoed until today. ``You can sell the assets, but what has driven the value has gone, the story is destroyed.''

Von Finck sold his one-quarter stake after hiring Rothschild & Cie. on Feb. 7 to find a buyer. The billionaire's Custodia Holding AG investment company said today that he opted to sell ``after examining strategic alternatives.'' The deal requires antitrust approval, Munich-based Custodia said.

Macquarie, Toll Brothers

Von Finck's search for a buyer had fueled speculation that the company would be broken up and Leighton and Turner sold off. Australia's Macquarie Bank Ltd. was touted as a bidder in a Jan. 25 report in Manager Magazin and German weekly WirtschaftsWoche said on Jan. 29 that U.S.-based Toll Brothers Inc., Bechtel Group Inc. and Bucyrus International Inc. might make an offer.

Private-equity firms and a range of possible trade buyers, including Spanish builders, were also reportedly interested.

``It's no surprise that a Spanish company is buying it, but it's a big surprise that it's ACS, since they were focusing more on utilities,'' said Ingbert Faust, head of research at Equinet AG in Frankfurt. Faust, who rates Hochtief ``hold,'' said the purchase is ``bound to intensify takeover speculation'' about the company.

Utility Stakes

ACS became Spain's biggest builder with the purchase of Grupo Dragados SA in 2003, doubling its sales. The company has more recently invested in Spanish utilities and is the largest shareholder in Iberdrola SA, Spain's No. 2 power company, and Union Fenosa SA, the No. 3, with holdings valued at a combined 8.7 billion euros. It also owns a quarter of Abertis Infraestructuras SA, Spain's biggest road operator.

ACS, which plans to boost net income 20 percent this year, with a 10 percent increase in sales, plans to finance the Hochtief deal using existing credit lines. The transaction won't have a ``relevant'' impact on earnings this year, it said. The Spanish company said it will be ``an industrial shareholder'' in Hochtief.

Luetkestratkoetter, who takes over from Hans-Peter Keitel, Hochtief's CEO for the past 15 years, said in the interview earlier this month that he'd like the builder to target more public-private partnership contracts, in which companies finance, build and run state infrastructure projects.

Areas to be targeted include logistics and healthcare orders, he said.

Shares of Eiffage rose 5.59 euros to 85.2 euros, the sharpest gain since June 9. Sacyr, based in Madrid, began building a stake in Eiffage a year ago, spending more than $2 billion before its French rival thwarted attempts to appoint directors to the board at a meeting last April.

To contact the reporters on this story: Joao Lima in Madrid at jlima1@bloomberg.net; Stefanie Haxel in Frankfurt at shaxel@bloomberg.net

Last Updated: March 21, 2007 13:48 EDT