Arcadis sees 3Q11 revenues down 2-3% y/y (-3% kbcs) while posting 3% organic growth (3.5% kbcs). Developments are generally in-line with 1H11: while South America (Brazil, Chile), Environment and Project Management (buildings) in the US, RTKL Middle East & Asia, and Germany and France continue to perform well, the US local water remains negative, local government demand in the Netherlands and Belgium is reduced and the revenues in Poland continue to decline further. However, the UK is graduallypicking up, mainly in the private sector. Underlying EBITA is now seen flat y/y and EBITA is seen ~10% lower than last year. This would indicate 3Q11 EBITA of € 31.6m, which is 2.1% lower than our current € 32.3m forecast.
Management furthermore reduces guidance of 0-5% growth in FY11 net income from operations vs. last year to approximately level with 2010. It blames this on Poland, financing charges and taxes, and notes that they expect market trends will not change significantly in the fourth quarter,even though the unrest in the financial markets has resulted in increased uncertainty regarding the development of the economy. We were banking on 3.9% growth and will cut our forecasts accordingly.
Merger (read: acquisition) with EC Harris:
Arcadis plans to merge with EC Harris, an international built asset consultancy group, headquartered in London. EC Harris derives 32% of its revenues from CEE, the Middle East and Asia, 57% from the UK and 11% from other European countries. The group derives gross revenues for its FY ending April 2011, of € 290m, net revenues of € 254m and a normalized EBITA margin of ~7%. Arcadis will finance the merger by issuing 3.0m shares to current EC Harris partners, in addition to a cash amount. The shares have a 12months lock-up period. The purchase price is based on similar valuation of other recent large acquisitions (read: 6-7x EBITA post-amortization tax benefits) and the transaction is expected to be accretive to eps as of 2012. It is anticipated that completion will occur in November 2011.
Rationale of the deal:
Through this merger Arcadis obtains a top 5 global position in strategic advisory and project services for built assets, lifts its position in Asia and the Middle East and becomes a top 10 player in the UK market, which should strengthen their position towards large clients.
Conclusion:
Based on an EV/EBITA of 7.5x (pre tax-benefits), 32% equity; 68% debt, no 1st year growth and synergies (conservative), € 3m 1st year amortization gains, a 6% COD, and 32% tax rate, we expect the deal to be ~2% earnings accretive from year 1 and could be ~€ 1.0/sh value accretive. Due to the partly financing of the deal in equity, the fact that EC Harris is profitable, and Arcadis has in the past mostly acquired debt free companies, we expect the Dutch engineer is still left with sufficient firepower to step into further acquisitions. We believe the current target area is now mainly on Brazil. A conference call is scheduled at 11.00 CET.