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AECOM Cancels Spin-Off; To Sell Management Services Business For ~$2.4 Billion

Ocotber 15, 2019, 10:36am (Forbes)

On October 14, 2019, AECOM (NYSE: ACM, $39.50, Market Capitalization: $6.2 billion) announced the sale of its Management Services (MS) business for a total consideration of $2.405 billion, resulting in cancellation of the previously planned spin-off transaction. The company has entered into a definitive agreement with the affiliates of American Securities LLC and Lindsay Goldberg. The transaction is expected to close in the first half of fiscal 2020. The sale of the MS business has been approved by the Board of Directors and is subject to regulatory approvals. The definitive purchase agreement includes customary cash, debt and working capital adjustments. Contingent purchase price of ~$150 million has been considered in the purchase price. Goldman Sachs & Co. LLC and DBO Partners LLC are serving as financial advisors and Wachtell, Lipton, Rosen & Katz is serving as legal advisor. Post transaction, John C. Vollmer, President of ACM’s Management Services group, and the existing management team will continue to lead the business.

Earlier, on June 17, 2019, AECOM had announced that its Board of Directors had approved a plan to spin-off the Management Services (MS) segment into a standalone government services company. On January 28, 2019, AECOM completed the spin-off of its private infrastructure investment arm, AVAIO Capital, which concentrated primarily on mid and late-stage projects in North America and Western Europe across four sectors: transportation, water, low-carbon energy and digital infrastructure. AVAIO has an exclusive sourcing and technical support relationship with AECOM, while retaining its full independence.

On June 20, 2019, investment management firm Starboard Value LP (4% stake in ACM) wrote a letter to Chairman and CEO Michael S. Burke, urging the company to explore sale of the Construction Services (CS) segment. The letter stated that AECOM was built through a series of acquisitions that have not been effectively integrated and the company’s various segments lag its peers on different operating metrics. Starboard Value also stated that substantial opportunity existed to improve profitability through integration and operational initiatives. Starboard Value reckoned that the sale of the CS unit which exhibited earnings volatility would simplify the portfolio. Moreover, the investment management fi rm also opined that a thorough evaluation of alternatives would be necessary, including an outright sale of the MS segment, despite the additional tax burden, compared to the more risky spin-off option.


For FY19, AECOM expects adjusted EBITDA of $940 million and adjusted EPS of $2.75, which approximates at the mid-point of prior guidance range. For FY20, ACM expects adjusted EBITDA of $1.04-$1.08 billion (13% YOY growth at the mid-point). On a pro-forma adjusted basis, comprising Design & Consulting Service, Construction Management and AECOM Capital businesses, the company expects FY20 EBITDA $720-$760 million (+17% YOY growth at the mid point).

The company will report the fourth quarter and full year results on November 12, 2019 and provide additional information on the outlook.

Deal Rationale

In June 2019, AECOM had announced spin-off of the Management Services (MS) business. According to management, the deal was part of the ongoing transformation, with various strategic initiatives already under way such as exit hard-bid-at-risk construction exposure, G&A reduction, divestiture of Production Services unit and exiting some countries to improve return on capital.

However, the sale of the unit at premium valuation unlocks significant value sooner than the previously announced spin-off. The impending sale at an 11.6x multiple of 2019 adjusted EBITDA represents significant premium to AECOM’s valuation. This divestiture would accelerate ACM’s objective of shareholder value creation through debt reduction and share repurchase.

The company intends to use the transaction proceeds for reducing debt substantially and repurchasing stocks. The company expects to maintain long-term net leverage between 2.0x and 2.5x. Post achieving the leverage targets, the company intends to prioritize the share buyback (remaining authorization of $750 million of the existing repurchase plan amounting to $1 billion).

Post completion of the divestiture and the ongoing strategic initiatives to de-risk the business and expand margins, AECOM will be a low risk, high return professional services firm focused on design, planning, architecture, engineering, program management and construction management capabilities. The remaining professional services business is expected to generate high returns on capital and consistently strong free cash flow.

AECOM (Parent) Formed in 1980, as Ashland Technology Company a wholly owned subsidiary of Ashland, Inc., an oil and gas refining and distribution company. The company provides planning, consulting, architectural and engineering design services to commercial and government clients worldwide in major end markets such as transportation, facilities, environmental, energy, water and government markets. The company has four reporting segments: Design and Consulting Services (DCS), Construction Services (CS), Management Services (MS), and AECOM Capital (ACAP). As of September 2018, the company had a total of ~87,000 employees.

Management Services (Spin-Off) Through Management Services, the company serves a wide variety of government departments and agencies, including the Department of Defense, the Department of Energy (DOE) and other U.S. federal agencies. It also serves departments and agencies of other national governments, such as the UK Nuclear Decommissioning Authority (NDA) and the UK Ministry of Defense. The various services offered by the MS segment includes program and facilities management, environmental management, training, logistics, consulting, systems engineering and technical assistance and systems integration and information technology.

Joe Cornell, Markets

I am the founding principal and publisher of Spin-Off Research, an independent advisory report featuring analysis of spin-off situations. I am the author of the book Spin-Off to Pay-Off: An Analytical Guide to Corporate Divestitures (McGraw-Hill). In addition to being a Forbes contributor, I have been featured or quoted in various media such as Barron’s, The Wall Street Journal, Bloomberg, Business Week and Fox Business.

I have published “Spin-Off Research”, an institutional advisory report featuring analysis on spin-offs since March, 1997. Spin-Offs often result in higher aggregate value for the constituent pieces. Many diversified companies are electing to spin-off parts of their business finding they can create significant value for shareholders.