Meesha - It is a sale of the utilities br. for the US marketI am not a CPA or CFA but in the infrastructure engineering and economics business.
Could it be that I and other analysts have it wrong? The understanding is that it is ultimately a sale at the discretion of Aecon and not the reverse.
Below is the analysis of NBF for your and that of our other distinguished readers consideration:
A win for Utilities business; more nuance needed at the consolidated level Aecon announced a partial 27.5% sale of its Utilities business for $150 mln to Oaktree – proceeds to be used for U.S. expansion.
The utilities business has TTM revenues of $931 mln (19.5% of TTM construction revenue) and TTM EBITDA of $80.4 mln (51.2% of total TTM construction EBITDA), representing an EV/EBITDA multiple of 9.3x (an implied EV of $750 mln for more than half the business’s EBITDA – recall we are already assuming (ex-IFRS) $90 mln in core construction 2023E EBITDA including the Utility business, $46 mln in equity projects EBITDA and $2.33/share for Bermuda).
The terms of the equity investment from Oaktree include 12% annual coupon payments for the first three years and 14% thereafter for a total of up to seven years, after which Aecon can buy back the 27.5% stake or IPO the business.
In lieu of coupon payments, Aecon can let the interest accrue into the principal amount (something it plans to do as indicated by management). This payment-in-kind (PIK) structure of letting coupon payments accrue will result in a convertible preferred equity amount of $400 mln for Oaktree on ARE’s balance sheet (still a $27.5% stake as there is no dilution from the PIK) after seven years of compounding assuming all payments are accrued to the principal.
Management expects the market value of the utility business will be worth significantly more than that and could pay off Oaktree using the proceeds from the spinoff of the business after seven years.
Below are our high-level takeaways from the sell-side management call:
• Management is seeking to accelerate its U.S. expansion strategy. With the IIJA and IRA significantly accelerating construction spending in the U.S., utilities-related end markets should see robust fund flow for the foreseeable future, helped by broader energy transition tailwinds. While ARE’s utilities business currently derives less than 5% of its $931 mln top line from the U.S., the transaction provides a base for long-term expansion in this geography. The $150 mln inflow should reduce leverage at the corporate level for the time being, but proceeds could ultimately be directed towards M&A opportunities (ideally a $100 mln to $200 mln top-line acquisition at a mid-single-digit EV / EBITDA multiple, though smaller tuck-ins are also possible).
• Oaktree’s portfolio companies could open up new revenue opportunities. Oaktree’s existing expertise in and exposure to the U.S. utilities space (namely through its investments in Enercon and ITG Communications) is expected to increase the scope of Aecon’s bidding universe and hopefully lead to revenue synergies.
He concludes that the market is now valuing the construction business with a 4.8B TTM revenue *(vs 931m TTM for utilities) including 6B in backlog (of which less than 10% are LSTK) at MINUS 674m.