The investor response has been emphatic. Since NRW Holdings (ASX: NWH) announced on Monday it was spending $85 million cash to acquire Queensland contracting peer Golding Group, NRW’s market capitalisation has gone up by almost $89 million.
It is not often you see a company’s market value increase so quickly by more than the value of the acquisition, particularly if the purchase was part-funded by an equity raising. (And the increased market value does not include the additional 36.8 million shares issued by NRW in an institutional placement to raise $25 million towards the Golding acquisition.)
But the market obviously identified compelling value in not just the strategic rationale for NRW to absorb the Golding business, but also in the valuation metric used.
Based on the past financial year numbers, Golding recorded revenue of $369 million for earnings before interest, tax, depreciation and amortisation of $53 million.
The Golding acquisition price was struck at 1.6 times EBITDA, a low multiple that greatly enhances the earnings per share accretion for the enlarged NRW.
NRW produced its 2016-17 numbers yesterday to highlight $370.3 million of revenue and underlying EBITDA of $58.8 million, up 25% on the previous year.
The result demonstrated the strength of NRW’s turnaround – another measure has been the share price recovery from levels around 6¢ at the start of last year to 66¢ by the time NRW placed its shares in a trading halt on Monday while it finalised the Golding deal.
But it was the Golding deal that placed a rocket under the NRW valuation.
Firstly, it allowed NRW’s advisers Longreach Capital, UBS and Euroz to price the $25 million equity placement at 68¢, a premium to the company’s prevailing price of 66¢.
When the sharemarket had its first chance to pass judgment on the Golding deal, from Tuesday morning, NRW’s stock rallied to as high as $1.04 – a level not seen in three years – before today ending the week at 93.5¢. It takes NRW’s market capitalisation to $335 million (including the equity placement stock).
One would imagine NRW’s $5 million share purchase plan, under which existing shareholders (those on the register by August 11) can subscribe for up to $10,000 of new stock at the 68¢ placement price, will fly off the shelf.
For NRW, the Golding acquisition broadens this Perth-based contractor’s exposure in the east coast mining and civil infrastructure markets. NRW has a proven track record of managing contracts and clients well, and the market response reflects the high faith in NRW’s ability to maximise returns from Golding’s $500 million order book and further grow the 75-year-old business.
It also continues a busy period for WA’s leading contractors as they try to adapt to a changing economic landscape in the local mining and infrastructure sectors.
Privately owned BGC Contracting added a second major east coast deal in as many months when it three weeks ago picked up a major piece of work on the $4.4 billion Pacific Highway – Woolgoolga to Ballina – upgrade project in NSW.
Just weeks earlier BGC had celebrated the award of a $700 million mining and equipment maintenance services contract with Idemitsu Australia at the Boggabri coal mine in NSW. BGC is no stranger to east coast mining work, having in March been awarded a $720 million contract to continue working at the Iron Knob and South Middleback Ranges iron ore operations in South Australia.
And Macmahon Holdings (ASX: MAH) fresh from fending off a hostile takeover approach from its erstwhile biggest shareholder CIMIC, is settling into a new relationship as the life-of-mine mining services provider at the Batu Hijau copper-gold mine in Indonesia.
As part of the transformational deal, Batu Hijau’s owner AMNT emerged as a 44.3 per cent shareholder in Macmahon – a deal struck at 20.3¢ a share, a significant premium to Macmahon’s prevailing share price.