DEALTALK-Private equity bid for Jacobs Engineering unlikely

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* E&C firms’ balance sheet has less leverage scope for PE

* Little opportunity for PE to create incremental value

* Cash stream volatile due to cyclical nature of business

* Jacobs eyes deals; unlikely to sell itself

By Bijoy Koyitty and Divya Sharma

BANGALORE, April 23 (BestGrowthStock) – Speculation that two
private equity firms are eyeing Jacobs Engineering (JEC.N: ) may
turn out to be unfounded since engineering and construction
services companies lack certain key traits that private equity
usually looks for in a target.

A private equity model typically examines the scope for
significantly leveraging the balance sheet of the acquired
firm, but buyers of people-services-oriented companies such as
Jacobs will not find large material assets to show against
debt, analysts said.

Private equity firms also look for opportunities to cut
costs in potential targets, but engineering and construction
(E&C) services firms have already shed a lot of flab in the
past two years.

“The best-in-class E&C companies are already very
efficiently run, and as such we see little opportunity for
private equities to create incremental value,” said Edward
Trafford of Northern Trust Global Investments, which has
investments in Jacobs Engineering.

The E&C companies that Jacobs competes with include Fluor
Corp (FLR.N: ), URS Corp (URS.N: ), Foster Wheeler (FWLT.O: ) and
AECOM Technology Corp (ACM.N: ).

It is also difficult to lever up their balance sheet due to
the cyclical nature of the business, which makes the cash
stream much more volatile than that of a typical industrial
company, Macquarie Research analyst Sameer Rathod said.

Jacobs Engineering reported cash and cash equivalents of
$1.1 billion as of the start of this year. The company has
total debt of $114.1 million.

Shares of Jacobs, which offers services such as
engineering, design and construction, rose to $48.27, their
highest in about a year, on April 9 on speculation about a
private equity takeover. [ID:nSGE6380JM]

Rumors at the time mentioned buyout giants Blackstone Group
(BX.N: ) and TPG Capital as potential bidders at a price of $56
per share.

When contacted, both companies declined to comment. Jacobs
Engineering was not immediately available for comment.


A key argument was that private equity firms may be
interested in E&C companies’ strong-looking cash flow and
minimal capital investment, but analysts said the actual cash
is not as large as what is reported on the balance sheet.

“When they start a contract, they get advanced billings, so
the cash builds up,” Rathod said.

However, that cash is used to buy materials and for other
expenses needed to start the project, he said. “What you want
to look at is the unencumbered cash.”

The cash is also restricted because the companies need to
maintain enough liquidity on their balance sheets to start
larger projects, especially for government contracts.
Most analysts also questioned the likelihood of the
$56-a-share deal, saying Jacobs deserves a better price.

Jacobs shares currently trade at 19.4 times forward
earnings, a 28 percent premium to its peers, according to
Thomson Reuters StarMine SmartEstimates.

For a factbox click on [ID:nSGE63M0KG].

The shares have lost more than half their value since they
touched a high of $103 in January 2008. But they have rebounded
from a 52-week low of $26.02 hit later that year and were
trading at $48.81 midday Friday.

The broader construction and engineering industry index
(.15GSPCSE: ) has shed 25 percent in the past two years.

“Why would you sell at these levels at the bottom of the
cycle when at the top of the last cycle the stock was close to
$100?” Morgan Joseph analyst Richard Paget asked.


Jacobs Engineering, which purchased two professional
services companies in the past five months, has said deals will
be a key growth strategy.

In December, it bought Tybrin Corp, a 1,500-person firm. In
February it bought Jordan, Jones and Gouldin, a company
operating in the North American water and wastewater market.

“We note that Jacobs has historically grown itself
organically and via acquisitions, and we would be surprised if
management was looking for an exit strategy at this point in
the cycle,” Broadpoint Amtech analyst Will Gabrielski said.

The broader E&C sector has yet to revive its appetite for
larger deals following the economic slowdown. The last large
deal was URS Corp’s purchase of Washington Group for about $3.1
billion in late 2007.

The rationale for acquisitions within the space is
typically driven not by synergies but by capabilities,
end-markets and geographies, Northern Trust’s Trafford said.

Particularly compelling end-markets include upstream oil
and gas, non-U.S. refining and petrochemical expansions within
the Middle East, he said.

From that perspective, Jacobs is not an attractive target
as it is more focused on North America and Europe, Macquarie’s
Rathod said.

(Reporting by Bijoy Koyitty and Divya Sharma in Bangalore;
Editing by Anne Pallivathuckal)

DEALTALK-Private equity bid for Jacobs Engineering unlikely