Prices for engineering firms near a peak

Merger mania: Engineers with mining connections are in keen demand Bloomberg News

Engineering is booming and so are company valuations. In March, Danish consultancy FL Smidth finally won the fight with Scotland’s Weir Group for Brisbane-based Ludowici. It paid $11 a share for a company that in January was trading at under $4.

Earlier this month another Brisbane-based company, Industrea, agreed to a takeover offer from giant US conglomerate GE worth $470 million – a price equal to 5.5 times earnings before interest, tax, depreciation and amortisation (EBITDA).

The demand for qualified workers and skills to turn the wheels of the resources boom is pushing not only salaries but the prices of firms to levels not seen before. A rule of thumb for pricing engineering firms is that they sell for about four times their EBITDA but the Industrea-GE transaction shows that can go higher.

Hyder Consulting Australasia, the local arm of UK-listed Hyder Consulting, in March paid $3 million for GW Engineers, a Sydney-based firm with 50 professional staff that specialises in engineering design services to the mining, heavy industrial and waste management industries, with another $4 million payable depending on future performance.

Managing director Greg Steele says Hyder had been looking for two years before it made the acquisition.

“We looked at a company in Perth and walked away,” Steele says. “The price was just ridiculous. You’ve got to find something that really does fit your organisation very well and be very diligent in who you’re purchasing.

“We’ve been looking at many companies. We really waited until we found the right one. It’s not as big as we would have liked but a good fit and the price is right.”

So how much is too much? It’s only worth spending on something that brings a strategic advantage, RBS Morgans analyst Alexandra Clarke says. “If you can slot it into your business and get better synergies off a differentiated service, then you’d be willing to pay more than person next to you who’s not going to get any benefit other than more work,” she says.

“You’re going to get a higher multiple for companies that offer intellectual property.

“The problem with buying people is that people move. You don’t actually want to pay too much for a people business. You’re better to go and poach.”

For Hyder, which has worked in Australia for more than 70 years, buying GW Engineers gave it much-needed exposure to the resources boom.

“We’re one of the bigger players with rail, highways, ports and maritime – [but] without exposure to the mining sector,” Steele says.

“GW have good relations with mining sector clients like Xstrata. They’re really focused on mining.”

More rationalisation is likely in the industry. Melbourne-based SKM is in talks with other firms that may lead to a merger or outright takeover of the company.

SKM has grown from 600 staff to more than 6000 in the past 10 years.

The Perth-based group Clough may also be in for a shake-up. The resources-exposed company is owned two-thirds by South African conglomerate Murray & Roberts, which reportedly needs the cash it could get from selling its stake.

Separately, Clough owns a 33 per cent stake in Forge Group, another firm focused on the mining industry.

Further interest in domestic engineering firms is likely to be stoked by the growing liquefied natural gas industry as coal seam gas and liquid natural gas projects increase, RBS Morgans’ Clarke says.

“We will probably find more in oil and gas coming up. There’s a hell of a lot of work there,” she says.

“The guys who are going to be acquiring are the offshore guys wanting leverage to Australia.

“You’re going to get the big overseas companies come in. M&A is going to be an ongoing theme.”

But Hyder’s Steele thinks that the era of rising prices has almost run its course.

“If you’re well managed, [have] good cash control etc, then there could be some bargains out there in the next 12 months or so.”

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