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Sat 18 Dec 2010 12:00 AM

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Deal of December

A new shareholder and a takeover battle at Hochtief hinted at wider activity in construction mergers and acquisitions.

Deal of December
NO THANKS: Hoctief’s work force are unenthusiastic about the prospect of Spanish ownership.( Photo credit: AFP/Getty Images)

Merger and acquisition activity is often cited as an
informal indicator that markets and industries are strengthening, showing that
cash is available through whichever source for companies looking to buy, or at
least buy a stake in, a strong performer.

Earlier this month the attention of the international
contracting market was piqued when German contractor Hochtief announced that
Qatar’s sovereign wealth fund is its newest shareholder, investing EUR 400
million (US $527.7 million) to take a 9.1% stake.

The fund, Qatar Holding, had made sounds that it was
interested in such a purchase for some time. The timing of the move made sense
to some analysts in the midst of the ongoing attempts by Spain’s
Actividades de Construccion y Servacios (ACS) to takeover Hochtief. ACS already
owns just less than 30% of Hochtief. Hochtief had announced a 30% capital increase
programme after its last annual general meeting earlier this year – a plan that
gives investors a number of options to increase their stake under different
conditions – and has raised the investment level needed by ACS to take a
controlling stake.

That the announcement was made in the middle of the capital
increase window, rather than at the end of December when it closes, has meant
“the fight has just begun” in the view of some.

“It would probably have been better to present the new
shareholder at the end of the offering period,” said Marc Nettelbeck at DZ

“Presenting now could be a good idea, as now the market
thinks that there might be another agreement with Qatar Holding for it to
increase its shareholding.”

He added that a 9% stake would not exactly give protection
from a hostile bid and that ACS is likely to resume its takeover attempt.
Earlier this month the German government indicated that it would not intervene,
should ACS make a further offer for the company.

Nettelbeck estimated that, based on Hochtief’s share price
increase since the inclusion of Qatar Holding, and the dilution of ACS’s
holding by 29.99% down to around 27%, means the Spanish firm will likely have
to pay around EUR130 million (US$173.5 million) more to cross the 30% ownership

Analysts tracking the company have recently rallied around
Hochtief, which rose more than 6% in three days. Ingbert Faust at Equinet, in Frankfurt, posted a ‘buy’ rating on the company’s equity,
predicting an outperformance of 8.75%. This followed ‘buy’ ratings from
Nettelbeck, Tobias Loskemp of Kepler Capital Markets, Gregor Kuglitsch at UBS
and Steffan Roehle at Independent Research.

The deal increases the links between Hochtief and the
gas-rich state. In March it signed a $114.8 million joint venture with Bahrain
Airport Company (BAC) to provide facility management services at Bahrain International Airport.

The Qatar Holding stake “will make it easier for the company
to get work,” according to an analyst in London,
who declined to be named.

“A lot of [foreign] companies are in joint ventures with
local companies, and they are now close to the Qatari government.”

In relation to the ACS bid, the source added: “Hochtief want
to keep the Spaniards out – whether this stake will help them I don’t know.

“They want to dilute ACS’s shareholding, so there’s no
coincidence that the company is revealing it now, and get it done before the
capital increase closes.”

ACS first announced its takeover bid on 16 September, news
that was a “surprise to us, because so far we had always received statements to
the contrary from ACS,” according to Herbert Lütkestratkötter, Hochtief’s chief

The German firm thought and moved quickly: by 4 October
Hochtief announced it would defend the company from the offer. The next day it
announced it would apply to the Australian Securities and Investments
Commission – Australia’s
stock market regulator – to highlight that to take effective control of the
company, ACS would also need to make a takeover offer for Leighton Holdings
Limited: Hochtief holds a 54.5% stake. ACS has so far declared that it does not
want to make an offer for the outstanding shares in Leighton.

New trend

A gradual improvement in economies and financial markets
this year, coupled with more lenient credit markets, has increased the
potential for merger and acquisition activity, though it is far from a
straightforward phenomenon. PricewaterhouseCoopers called the engineering and
construction (E&G) M&A sector in 2010 a ‘curate’s egg’, a phrase that
relates to an entity that contains very good and very bad parts simultaneously.

Where 2010 likely will exceed the 2009 total in deal volume,
and total year-to-date deal value will top the full-year 2010, ongoing concerns
about the strength of a global recovery means “many global buyers and sellers
are taking a wait-and-see approach to deal making” (Q3 2010 global engineering
& construction mergers and acquisitions analysis).

At the same time the research analysis highlights reasons
why both US and European buyers looking at emerging market construction firms,
and emerging market firms targeting the US
and Europe, should be wary.

“For risk-averse US and European E&C companies, it can
be difficult to get comfortable with the premium attached to emerging market
businesses,” the study points out.

“Risk aversion also affects buyers from emerging markets
seeking to buy low-growth assets within the US
or Europe. In these cases, skepticism about
the true value of the asset often derails the deal.”

Analysts agree that ACS will not be cowed by Hochtief’s new
shareholder. The Spanish firm still needs to cross the 30% ownership threshold,
but as Nettelbeck points out, the new stakeholder and equity issuance means it
will have to buy two million more shares against the 10,000 required

Another analyst in Frankfurt,
who also declined to be named, pointed out that if ACS is not successful his
time around, it would have to wait a year. As Hochtief uses all resources at
its disposal to remain independent, the manoeuvres are “all quite hidden”.

Credit Suisse, Hochtief’s advisers during the recent share
activity, declined to comment on the issue.

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