Macmahon expands civil infrastructure business with Decmil acquisition

Perth-based mining services company Macmahon Holdings (ASX: MAH) has secured a deal to expand its civil business through the acquisition of fellow Perth construction firm Decmil (ASX: DCG).

The deal is expected to provide an established and scalable foundation for Macmahon to accelerate the growth of its civil infrastructure business, diversifying its earnings and improving overall returns on invested capital through lower capital intensity.

It will add $6 billion in non-mining civil construction projects (including renewables and government infrastructure work) to Macmahon’s existing $4b civil pipeline and contribute an order book of approximately $450 million.

Broadening presence

The addition of non-mining projects is expected to offset the cyclical nature of the mining sector.

The deal will also broaden Macmahon’s presence in Victoria and Queensland and present opportunities to expand into New South Wales and South Australia.

Macmahon said it would leverage Decmil’s licences for the construction of road and bridge projects throughout Australia to move towards its long-term civil infrastructure revenue target of $1b per year, representing 33% of group revenue.

Cash considerations

The proposed acquisition will comprise separate interdependent schemes that will see Macmahon offer Decmil shareholders a cash consideration of $0.30 for every ordinary share held and $0.343 for every redeemable convertible preference share (ASX: DCGPA).

The ordinary consideration represents an 81.8% premium to the 30-day volume-weighted average price of Decmil shares, while the redeemable preference consideration represents a 71.5% premium to the $0.20 face value of the convertible shares.

The acquisition is expected to be earnings accretive for Macmahon and underpinned by forecast improved earnings of Decmil’s civil construction business.

It will be fully funded from Macmahon’s cash reserves, which includes $44m in proceeds from recent equipment sales and existing debt facilities.

On completion of the transaction, Macmahon will integrate its civil business into Decmil’s operations and run the company as a wholly-owned subsidiary under the same name.

Decmil will continue to be led by current chief executive officer Rod Heale.

Macmahon has appointed HWL Ebsworth Lawyers, Highbury Partnership and Azure Capital as joint corporate advisers.

Decmil is being advised by Steinepreis Paganin and MA Moelis Australia.

Scalable business

Macmahon chief executive officer Michael Finnegan said the acquisition of Decmil would help deliver a more resilient and scalable business enabling greater returns to shareholders.

“Decmil provides an established and well-credentialled platform to allow us to better pursue a large opportunity pipeline of resource civil and rehabilitation opportunities,” he said.

“This deal will diversify [our] earnings towards renewables and infrastructure, which are expected to have an increased level of spending in the next decade.”

‘Accelerated’ value

Decmil chair Andrew Barclay said the transaction represented “attractive value” for shareholders.

“Macmahon’s all-cash offer at a strong premium to [our] current share prices provides our investors with certainty and accelerated value today, which Decmil’s position as a standalone company cannot be guaranteed to provide,” he said.

“I have absolute confidence in Decmil’s future performance as a mid-sized player in the civil engineering sector.”

“[However,] without the assistance of an extensive balance sheet offered by companies such as Macmahon, achieving full recognition for that performance would not be without challenge.”

Board recommendation

Decmil’s board has recommended shareholders vote in favour of the Macmahon proposal.

Major investors Thorney Investment Group and Horley Pty Ltd are believed to have already indicated their support.

The two companies hold a combined 26.7% of Decmil’s ordinary shares and 38% of redeemable convertible preference shares.