AECOM ACM has entered into an agreement for the sale of the Management Services business, marking an important milestone for its ongoing portfolio transformation. The sale to American Securities LLC and Lindsay Goldberg is expected to close in first-half 2020.
Shares of AECOM gained more than 6% post the announcement of the news, closing Oct 14 session at $39.50.
Terms of the Deal
The transaction, which is valued at $2.405 billion, reflects an 11.6x multiple on expected fiscal 2019 adjusted EBITDA and a premium to AECOM’s overall valuation. The price also includes the contingent purchase price of approximately $150 million.
Rationale Behind the Sale
Management Services is a major contractor to the federal government, its agencies and allied governments. This deal is in line with AECOM’s ongoing execution of strategies, including $225-million General and Administrative (G&A) reduction plan, to de-risk the business and maximize shareholder value.
The company — which has already completed 25% of its country exit plan as of Dec 31, 2018 — intends to exit more than 30 countries in order to prioritize investments in markets with higher prospects and competitive advantages.
Post the completion of the latest divestiture, the resulting professional services business is expected to be a lower risk, higher-returning firm focused on industry-leading design, planning, architecture, engineering, program management and construction management capabilities.
AECOM — a Zacks Rank #3 (Hold) company — intends to reduce debt, repurchase shares and maintain the long-term net leverage target of 2.0-2.5x through this transformative and value-enhancing approach. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Fiscal 2019 & 2020 View
AECOM expects fiscal 2019 adjusted EBITDA and EPS to be approximately $940 million and $2.75 million, respectively. It expects record free cash flow in the fiscal fourth quarter and anticipates free cash flow of at least $600 million for fiscal 2019. This has resulted in debt reduction in the fiscal fourth quarter.
For fiscal 2020, it expects adjusted EBITDA between $1,040 million and $1,080 million, indicating 13% year-over-year growth at the mid-point. On a pro-forma adjusted basis (comprising the Design & Consulting Service or DCS, Construction Management and AECOM Capital businesses), AECOM expects EBITDA between $720 million and $760 million, suggesting 17% year-over-year growth at the mid-point of the range.
AECOM — which shares space with Jacobs Engineering Group Inc. JEC, KBR, Inc. KBR and Altair Engineering Inc. ALTR in the same industry — reiterated its expectation of at least 8% adjusted operating margin at the DCS segment in fiscal 2020.
Share Price Performance
The company’s shares have gained 49.1% so far this year, comparing favorably with its industry’s rally of 17.7%. AECOM’s endeavors to improve profitability and de-risk the business profile by focusing more on the fastest-growing markets having more competitive advantages are expected to drive growth.
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