SNC-Lavalin Group Inc. (SNC) made its biggest acquisition yet in agreeing to buy Kentz Corp. (KENZ) for 1.16 billion pounds ($1.97 billion) as it seeks to expand in the oil industry where profit margins are high.
The price of 935 pence a share is 33 percent more than last week’s close for Kentz, Montreal-based SNC said in a statement today. SNC said the Kentz purchase probably will close in the third quarter.
Adding Kentz fits Chief Executive Robert Card’s plans to reshape Canada’s biggest engineering and construction company after a corruption scandal. Card, who has been CEO since October 2012, made sure SNC would have enough heft for the deal by agreeing in May to sell the AltaLink power-transmission unit to Berkshire Hathaway Inc. for $2.9 billion.
“The acquisition makes a lot of sense as it accomplishes the commencement of SNC’s oil and gas rebuild cycle, makes lower risk services revenue a dominant share of company’s top line and deploys the proceeds of the AltaLink acquisition into a well-understood and strongly performing asset,” Maxim Sytchev, an analyst at Dundee Securities Corp., said today in a note to clients.
The deal is the company’s biggest since at least 1991, when SNC Inc. acquired smaller neighbor and rival Lavalin Inc., Bloomberg data show. SNC rose 1.7 percent to C$53.31 at the close in Toronto, its biggest gain since June 6.
The acquisition will boost SNC’s backlog by C$4.9 billion, more than three-quarters of which will come from lower-risk and higher-margin services-based contracts. The combined company will have a backlog of future work of about C$13 billion, SNC said.
SNC, which will fund the deal with cash and new credit, said oil and gas offers higher growth than other infrastructure and it expects a contribution to earnings within the first year. The company was said to have first looked at buying Kentz last year, when the share price was less than 500 pence.
“Our analysis shows that the oil and gas market over the last decade has overall produced the highest margins, the highest profit figures and the best growth in our industry, which is why there are very few acquisition targets available,” Card said today in a telephone interview.
“Clients are very demanding and sophisticated. That toughens a company up to compete in other areas. So we concluded in our long-term vision of a company roughly twice the size we are that we could make it work without oil and gas, but we’d be a lot more dangerous to our competition if we had it.”
Kentz soared 32 percent to 929 pence in London, its biggest single-day gain since the stock began trading in 2008.
“This is a pretty reasonable price for Kentz given it’s all cash,” said Daniel Slater, an analyst at Arden Partners PLC in London, in an e-mailed note. “The fact that the deal is expected to be quickly accretive for SNC-Lavalin could leave room for another bidder at a higher level.”
Kentz was approached last year by companies including Amec Plc (AMEC), a U.K. engineer whose proposal was rejected for being too low. SNC-Lavalin considered a bid then, a person familiar with the situation said at the time.
SNC doesn’t foresee a bidding war emerging for Kentz, though it would be ready to react should a rival suitor emerge, Card said.
Bidding wars “are things best avoided,” the CEO said on the conference call. “That’s why we’ve done a lot of homework around this transaction, so we’re not expecting it but we are fully prepared for it.”
Christian Brown, the Kentz CEO, will join the Canadian company to lead the oil and gas division. SNC expects annual savings of about C$50 million from moves such as the delisting of Kentz from the London Stock Exchange.
Kentz, which traces its origins to an electrical contractor started in southern Ireland in 1919, employs 14,500 people in 36 countries. In December, the company agreed to buy Valerus Field Solutions for $435 million in cash to expand in U.S. shale and Latin America.
SNC will finance the transaction with an asset sale bridge loan of C$2.55 billion and a term loan of C$200 million. SNC will repay the bridge loan with proceeds from the sale of AltaLink, which the company expects to close by the end of 2014.
Card said today he isn’t ruling out further transactions that would allow SNC to continue to expand its oil and gas business. Resources industries will represent about 40 percent of SNC’s revenue once the acquisition closes, he said.
“This sets the foundation for us,” he told analysts on a conference call. “We’re not in a hurry to do something else in any area. We have to digest this. But if something were to come along that would enhance the oil and gas portfolio, we would take a hard look at it.”
To give itself more ammunition for deals, SNC may speed up the planned sale of its minority stake in 407 International Inc., the operator of a toll road near Toronto, Card also said.
“We had been speaking in our last call about 407 as a mid-term opportunity, which I described nominally at one to three years,” he said today. “Given the success of what’s transpired over the last couple of months, I would say that’s more nearer-term than mid-term. We’re looking hard at if we want to accelerate that.”