China Communications Said Close to Purchase of John Holland

China Communications Construction Co. is in late-stage talks to buy builder John Holland from Leighton Holdings Ltd. for about A$1 billion ($833 million), according to a person with knowledge of the matter.

An agreement could be reached as soon as this week, said the person, who asked not to be identified as discussions are private. Leighton spokeswoman Fiona Tyndall declined to comment. China Communications Construction declined to comment in an emailed statement issued via its external public relations representative.

Leighton, Australia’s biggest builder, said in June it might sell the John Holland business that built the country’s parliament, seeking to reduce debt as controlling shareholder Hochtief AG tightens its grip on the company. Leighton will also review its services and property units and consider taking on partners, Executive Chairman Marcelino Fernandez Verdes said in a regulatory statement in June.

“In theory, it’s supposed to be good for both sides. Purchasing a local company is the fastest and easiest way to penetrate that market, and the local firm will get a fresh injection of capital,” Jackson Wong, associate director at United Simsen Securities in Hong Kong, said of the proposed deal in a telephone interview. “But the track record of Chinese companies making overseas acquisitions hasn’t been all that good, it’s been rather mixed.”

Chinese companies have announced $2.8 billion worth of deals into Australia in the past year, down 43 percent from the previous 12 months, according to data compiled by Bloomberg.

Infrastructure Spending

The Australian Financial Review reported details of the potential deal earlier today, saying an announcement could come Friday. The deal comes after Australia’s leader Tony Abbott said during the country’s election campaign last year that he wants to be known as an “infrastructure prime minister.”

Australia’s federal government has promised to contribute A$50 billion alongside state and private spending to drive about A$125 billion of infrastructure spending. Planned projects include freeways in Sydney, Melbourne and Brisbane, upgrades to highways along the country’s east coast, and the building of a new inland railway between Melbourne and Brisbane.

Earlier this month, China Communications Construction held talks with Australia & New Zealand Banking Group Ltd., Bank of China Ltd., HSBC Holdings Plc and Morgan Stanley for a $1.1 billion bridge loan facility to back its bid for John Holland, people familiar with the matter said earlier.

Last month, the Beijing-based company said it planned to raise as much as 14.5 billion yuan ($2.4 billion) in a preferred sale of shares to as many as 200 investors, according to a statement posted to Shanghai’s stock exchange.

Independent Companies

Shares of China Communications Construction ended up 2.6 percent at HK$8.41 in Hong Kong trading today, extending gains this year to 35 percent. Leighton advanced 0.4 percent to A$21.70 in Sydney and is also up 35 percent year-to-date.

Ross MacMillan, a Sydney-based analyst at Morningstar Inc., said Leighton needs to simplify its structure. Its three domestic engineering companies -- Thiess, John Holland, and Leighton Contractors -- operate as independent businesses in similar market segments with differing areas of emphasis.

Separate Leighton units bid against each other for Brisbane’s Airport Link project and a desalination plant near Melbourne. That kind of competition tends to drive down the profitability of construction contracts.

John Holland built Australia’s turf-roofed parliament building, as well as the southern stand of the Melbourne Cricket Ground. It’s Leighton’s third-largest unit by sales, with A$4.5 billion of revenue in 2013 and A$198 million of earnings before interest, tax, depreciation, amortization and one-time items. The company has about 5,000 workers.

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