THE battle to control the country's biggest construction company, Leighton Holdings, is about to heat up as Spanish construction giant Grupo ACS shareholders meet this Friday in Madrid to vote for the issue of 50 per cent of new shares.
The proposed monster equity issue of 157 million new shares in ACS is tipped to succeed given more than 60 per cent of ACS's shareholders have already indicated their support.
Unlike other share issues, this is contingent on ACS needing the extra shares in its battle to control German construction giant Hochtief, which in turn controls Hochtief's jewel in the crown, a 54 per cent stake in Leighton and four seats on the Leighton board.
ACS is an active 29.9 per cent shareholder on Hochtief's share register and if all goes according to plan it will soon have the power and influence to break up Hochtief, sell off its assets, and overhaul the Leighton board, which recently fast tracked the retirement plans of chief executive Wal King after relations between King and Hochtief became toxic.
Once ACS shareholders approve the equity issue, the next step is for the German regulator BaFin to approve the offer, which was filed late last week. German authorities typically take 10 to 15 days to approve an offer once it has been filed, which means ACS would be allowed to start increasing its current stake from November 23 at the earliest. A strong rumour suggests it will use this equity firepower to complete the transaction by the end of January, paying a higher price than the current offer, which just happens to be when King relinquishes his crown.
ACS and King have a strong relationship. King has cultivated this relationship over the past few years - much to the chagrin of Hochtief,has which long feared ACS wanted to control Hochtief.
In May, King visited ACS in Madrid to discuss a joint venture between the two companies in mechanical engineering.
Leighton and ACS have been jointly tendering for a range of projects in Australia and Asia in the power and water sectors.
A merger between ACS and Hochtief would likely result in King taking a board seat at ACS and at some stage becoming one of its four representatives on the Leighton board a prospect that would make a number of people on the Leighton board uneasy.
Speculation is also rife that ACS has lined up some debt, again to make its bid for Hochtief bullet-proof. ACS needs 112 million shares to acquire 100 per cent of Hochtief.
And a hostile takeover wouldn't be complete without hedge
funds.
It is believed that up to 20 per cent of Hochtief's shares are in the hands of hedge funds, which are punting that if ACS wins control of Hochtief, it will overhaul the company and extract value.
British-based hedge fund Centaurus Capital, which is one of Hochtief's biggest shareholders, recently told the Financial Times that it "welcomed" ACS's approach and criticised Hochtief's management for failing to close the value gap.
Centaurus has a point. Hochtief's results show that the lion's share of its profit a massive 84 per cent come from its stake in Leighton; and its market capitalisation at ?4.38 billion ($AU6 billion) is less than two-thirds of Leighton's $9.5 billion market capitalisation.
This implies the market is chronically undervaluing the rest of Hochtief's assets, which are worth billions of euros. It also indicates that those assets need to be restructured to extract value.
These include Turner Constructions and Flatiron in the United States, an extensive concessions business that includes stakes in airports around the world, including Sydney Airport, a real estate business, and a construction business in Germany.
Deutsche Bank values Hochtief on a sum-of-its-parts basis at more than ?80 a share, which is well ahead of the ?62.64 the company closed at on Friday.
Since ACS announced its hostile takeover for Hochtief on September 16, the German-based construction giant has attempted, unsuccessfully, to derail the offer.
This included a search for a white knight, a plea to the German government to block the offer, an application to the Australian regulator ASIC to force ACS to make a follow-on "downstream" takeover offer for Leighton, and, more lately, an application from Leighton and Hochtief to the Australian Takeovers Panel to get it to block or force ACS to modify the offer.
With options running out, Hochtief is now listening to the mutterings of hedge funds - and shareholders and said last week it would consider selling or floating its airports and infrastructure concessions business to extract value. (Last year it tried to float the concessions business but had to withdraw it due to lack of investor interest.) It is early days but the news failed to put a rocket under the share price.
Between now and the end of January there will be many more twists and turns in the battle to create one of the biggest construction companies in the world, but for Leighton management, the board and shareholders, they are mere pawns in the process.
Frequently Asked Questions about this Article…
What is Grupo ACS proposing and why does it matter for Leighton shareholders?
According to the article, Spanish construction giant Grupo ACS has proposed a monster equity issue — 157 million new shares (about 50% of new shares) — to raise firepower for its hostile bid to gain control of German firm Hochtief. Hochtief in turn controls a 54% stake in Leighton and four seats on the Leighton board, so ACS’s move could directly affect Leighton’s ownership and board composition.
How could an ACS takeover of Hochtief change Leighton's board and management?
The article says that if ACS gains control of Hochtief it would have the power to break up Hochtief, sell assets and overhaul the Leighton board. A merger or takeover could lead to ACS placing its own representatives on Leighton’s board (four seats via Hochtief). The piece also notes that Leighton's CEO Wal King recently fast-tracked his retirement amid strained relations with Hochtief, and speculation exists that King could take a seat at ACS and later become one of ACS’s Leighton board representatives.
What approvals and timeline does ACS need before it can increase its stake in Hochtief?
The article explains that after ACS shareholders vote in Madrid to approve the equity issue (more than 60% had indicated support), the German regulator BaFin must approve the downstream offer. German authorities typically take about 10–15 days to approve an offer once filed, which would allow ACS to start increasing its stake from November 23 at the earliest. There’s also a strong rumour ACS could use the new equity to complete the transaction by the end of January.
How much of Hochtief does ACS already own and how many more shares does it need to buy 100%?
The article states ACS is already an active 29.9% shareholder on Hochtief’s register. It needs 112 million more Hochtief shares to acquire 100% of the company.
What role are hedge funds and investors like Centaurus Capital playing in this takeover battle?
The article reports that up to 20% of Hochtief’s shares may be held by hedge funds, which are betting that ACS will overhaul Hochtief and extract value. British-based hedge fund Centaurus Capital, one of Hochtief’s biggest shareholders, publicly welcomed ACS’s approach and criticised Hochtief’s management for failing to close a perceived value gap.
Is Hochtief considered undervalued and which Hochtief assets might be restructured or sold?
Yes — the article highlights a valuation gap. Hochtief’s market capitalisation (€4.38 billion) is cited as being less than two-thirds of Leighton’s AU$9.5 billion market cap, despite 84% of Hochtief’s profit coming from its stake in Leighton. Deutsche Bank’s sum-of-the-parts valuation puts Hochtief at more than €80 a share versus a recent close of €62.64. Assets mentioned that could be restructured or sold include Turner Construction and Flatiron in the US, an extensive concessions business (including stakes in airports such as Sydney Airport), a real-estate business, and Hochtief’s German construction operations.
What defensive actions has Hochtief taken to try to derail ACS’s hostile bid?
The article lists several defensive moves by Hochtief: searching for a white knight, appealing to the German government to block the offer, applying to the Australian regulator ASIC to force ACS to make a downstream takeover offer for Leighton, and joining with Leighton in an application to the Australian Takeovers Panel to block or force modifications to ACS’s offer.
What key events should everyday investors in Leighton or Hochtief watch over the next few months?
Based on the article, investors should watch the outcome of ACS’s Madrid shareholder vote on the equity issue, BaFin’s approval timing (typically 10–15 days after filing), any moves by ACS to increase its Hochtief stake (possible from November 23), rumours about ACS lining up debt or completing the deal by the end of January, Hochtief’s responses (asset sales or flotation of its concessions business), and any board or management changes at Leighton and Hochtief such as Wal King’s retirement.
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