Deals

Chris Hughes is a Bloomberg Gadfly columnist covering deals. He previously worked for Reuters Breakingviews, as well as the Financial Times and the Independent newspaper.

Having failed to enjoy a Trump bump, WS Atkins Plc's shareholders are getting some compensation from Canada.

A 2.1 billion-pound ($2.6 billion) bid for the British engineering firm pushed the stock to an all-time high on Monday, past levels last seen just after the U.S. election.

Record High
WS Atkins shares surged after SNC-Lavalin's announcement
Source: Bloomberg

Atkins says it is content with the 20.80 pounds-a-share in cash offered by Canadian peer SNC-Lavalin Group Inc. But a firm agreement needs due diligence and financing to be settled, hence the stock closed 6 percent below the bid price.

SNC clearly wants to be in the driving seat of a consolidating industry. The company paid $1.6 billion for Kentz Corp. back in 2014 and had been prowling for deals of as much as $3 billion, as my Bloomberg News colleague Frederic Tomesco reported in January.

Canada Calling
SNC-Lavalin gets 5 percent of its revenue from Europe
Source: Bloomberg

The logic behind targeting Atkins is scale and diversification. Just 5 percent of SNC’s revenue comes from Europe, against 49 percent at Atkins, whose projects have included working on the London Olympics and a new cross-London rail link. Atkins would also beef up SNC’s presence in consulting.

Rising Tide
WS Atkins's profit has been climbing in recent years
Source: Bloomberg
Data refer to adjusted net income

For Atkins investors, a deal would dig them out of a hole. The stock had gone almost nowhere in the three years prior to deal talks leaking. Stronger margins have driven earnings, but investors have fixated on weak top-line growth and a big pension liability. A possible tie-up with CH2M Hill Inc., a closely-held U.S. infrastructure firm, never materialized. The stock has given up all its gains since the U.S. election, and more.

Lagging Benchmark
WS Atkins has the trailed the index since the end of 2016
Source: Bloomberg

Might Atkins now get an auction started? SNC has seemingly set the price high. The offer is pitched at 42 percent above Atkins's average share price over the past three months -- a 615 million-pound premium.

Atkins Overseas
The engineering company gets more than half its revenue from outside Europe
Source: Bloomberg

Even so, a deal wouldn’t take long to stack up financially. Suppose cost cuts and revenue gains boosted 2019 operating profit to 200 million pounds, about 10 percent more than the consensus forecast. That would deliver a post-tax return on acquisition of about 8 percent, in line with the deal's estimated cost of capital. The required boost would be just 1 percent of Atkins’ annual sales.

What’s more, SNC has equity commitments from state pension fund CDPQ to fund a deal. That’s despite having net cash on its balance sheet.

Maybe SNC or another bidder could justify paying more. But an interloper would surely think twice before gatecrashing a determined buyer with the support of a state pension fund and a nod on price from Atkins’ management. The market’s caution about an auction looks warranted.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
Chris Hughes in London at chughes89@bloomberg.net

To contact the editor responsible for this story:
Edward Evans at eevans3@bloomberg.net