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Quanta (PWR) Wraps Up Three Strategic Acquisitions for $330M

Zacks Equity Research

Quanta Services, Inc. PWR announced the completion of three acquisitions — a sizable gas utility contractor in the Northeast and two specialty utility foundation contractors in the Southeast — for a total consideration of $330 million, comprising $328 million in cash, subject to working capital adjustments, and $2 million in stock. These buyouts will improve Quanta’s long-term visibility, and unlock attractive multi-year growth opportunities and accretive returns for stockholders.

Acquisition Rationale

Headquartered in Plainview, NY, Hallen Construction Co., Inc. is a leading gas utility contractor serving the U.S. Northeast markets. Hallen mainly provides gas distribution and transmission services, along with some underground electrical distribution and transmission exposure.

Quanta is expected to benefit from these markets, courtesy of old infrastructure and obligatory multi-decade gas system modernization programs that are in their early stages. Quanta will also be able to expand electric infrastructure services offering in the northeast, owing to Hallen’s dominant position in the region’s utility services platform. Meanwhile, it also completed the acquisition of two specialty utility foundation and pole-setting contractors serving the U.S. Southeast region.

These buyouts are expected to be accretive to its segments’ margins going forward. The company believes that the Hallen buyout and persistent margin enhancement efforts will aid Quanta in achieving its medium-term target operating margins of upper single-digits for the Pipeline and Industrial Infrastructure Services segment. The acquisitions are expected to be accretive to the company’s future cash flow and ROIC.

Quanta anticipates that these acquisitions will contribute $175 million to revenues in 2019 and $525-$575 million in 2020. However, it expects minor GAAP EPS dilution for the remainder of 2019 owing to increased amortization, interest expense, and transaction costs.

The company also expects 6 cents of accretion to 2019 adjusted EPS and 20 cents of accretion to 2020 adjusted EPS. This accretion excludes any cost or growth synergies.

Our Take

Quanta sees acquisitions as a fundamental component of its strategy to boost market share and develop incremental backlog. The company completed two acquisitions during the first half of 2019 and four during 2018. The 2019 and 2018 buyouts strategically expanded its domestic electric power and communications service offerings.

 

So far this year, this Zacks Rank #4 (Sell) company has gained 17.9%, almost on par with its industry’s 17.5% rally. We view these additions to be a strategic fit for Quanta, characterized by more revenue generation in the foreseeable future. Hallen, in particular, is expected to contribute significantly to the Pipeline and Industrial Infrastructure Services segment's mix of base business revenues.

Stocks to Consider

Some better-ranked stocks from the broader Construction sector include MasTec, Inc. MTZ, KBR, Inc. KBR and Great Lakes Dredge & Dock Corporation GLDD. While MasTec sports a Zacks Rank #1 (Strong Buy), the other two stocks carry a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

MasTec’s EPS growth for the current year is projected at 32.4%.

KBR surpassed estimates in all the trailing four quarters, with the average being 8.7%.

Great Lakes’ earnings are expected to grow 335.3% in 2019.

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