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UGL's attempts to add some bulk may not be in vain

It has been a while between corporate deals for the engineering and property services firm UGL, the most recent being the $163 million acquisition of a US corporate real estate services company, Equis Corporation, in 2006. Since then a steady stream of contract wins has kept UGL's organic growth ticking along.
By · 10 Feb 2010
By ·
10 Feb 2010
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It has been a while between corporate deals for the engineering and property services firm UGL, the most recent being the $163 million acquisition of a US corporate real estate services company, Equis Corporation, in 2006. Since then a steady stream of contract wins has kept UGL's organic growth ticking along.

Yet it seems that in the shadows of the financial crisis, the UGL chief executive, Richard Leupen, has pondered all avenues to transform the scale of his $2 billion business. Speaking at the group's annual results last year, Leupen hinted that a healthy balance sheet gave UGL the firepower to make a big acquisition if the right deal emerged.

Since then, sources say, UGL's strategy team has been working overtime, assessing strategic fit and valuation of a range of targets.

Close to the top of the list was Transfield Services. UGL's analysis is understood to have progressed beyond the desktop with Leupen initiating dialogue with the target. Transfield's market capitalisation of $1.6 billion means that it would be the junior partner in any merger, although not by much - both groups have about 28,000 employees. Talks look to have been terminated at an early stage when the Belgiorno-Nettis family, holders of a strategic 14 per cent shareholding in Transfield, were lukewarm on a combination with UGL.

Since then, sources say, UGL has run the ruler over its long-time rival Downer EDI, but any plans for a combination with the larger Downer business got little further than the drawing board, and are now thought to be at an end.

Leading the sector's consolidation could position UGL as a more significant rival to the much larger Leighton operation, but it seems Leupen is yet to identify the right opportunity.

However, with at least one deal in the construction and engineering sector slated for coming months, the float or trade sale of Bilfinger Berger's Australian operations, further jockeying for position may result.

In the meantime, murmurs suggest that UGL has a US rail business in its sights.

PIPE EXPERT

Scheme documents have been made public for the recommended $6.30 a share TPG acquisition of PIPE Networks and, combined with market jitters, have hushed pre-Christmas speculation that target shareholders were set to squeeze a few more cents out of the bidder.

Ernst & Young has done the honours as independent expert, valuing PIPE at $6 to $6.72 a share after applying a 9.5-10.5 multiple to maintainable EBITDA. A swing factor in any valuation of PIPE is the treatment of the undersea cable to Guam that the company commissioned last year, and PIPE's more vocal supporters are sure to argue that the expert has not recognised the potential of this cable. However, the Ernst & Young report is generally uncontroversial.

More curious is the revelation, tucked deep in the expert's report, that PIPE punted $10 million on buying shares in listed companies in December. With a recommended offer at a fixed cash price on the table, the PIPE board was in caretaker mode when the purchases were made, making it a remarkable deviation from normal business operations. PIPE has provided no clues as to which companies are involved in the investment activity, and a spokesman did not return calls.

MELCO DRAG

Half-year results for Crown look set to be dragged down by the poor results of Melco Crown Entertainment, the casino group's 32 per cent owned Macau joint venture.

Melco Crown's December quarter earnings hit rock bottom as changes to its arrangements for sourcing high-rolling gamblers dragged earnings down to $US2.7 million ($3 million) from $US22.4 million in the final quarter of the previous year.

While a pick-up in performance is expected, poor profitability from Melco Crown has led Macquarie analysts to cut 2010 profit forecasts for Crown by 27 per cent to $255 million despite continuing strong performance from Crown Melbourne and Burswood, the group's domestic casinos.

Macquarie has also cut its price target for Crown from $8.70 to $7.94, slightly above yesterday's closing price of $7.65. The reduced price target follows the slide in value of the group's Macau interests - the Nasdaq-listed Melco Crown shares have fallen from $US6.21 to $US3.52 since Macquarie's last valuation.

COCHLEAR HINTS

The odds of Cochlear emerging as the successful bidder in the current auction of Siemens AG's hearing aid unit must have lengthened after management did nothing at the company's results briefing yesterday that might fuel speculation that a big acquisition was on the cards. The initial rumour quickly gathered currency after surfacing on the slow news days last month.

Having neither completed an acquisition nor issued shares - outside of employment incentive programs - since listing in 1995, it would be unlikely the highly regarded Cochlear would proceed with an acquisition of about $2.8 billion without sounding out market support for a change in strategy.

Without entirely ruling out an acquisition, its chief executive, Chris Roberts, played up Cochlear's organic growth outlook yesterday and played down the level of synergies between hearing aid and implant businesses.

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