Cashed-up UGL considers its options

A process that began nearly a year and a half ago has culminated in the sale of UGL’s property business, DTZ, to a private equity-led consortium. But that’s probably only half the story.

UGL today announced it had agreed to sell DTZ to TPG Capital, PAG Asia Capital and Ontario Teachers’ Pension Plan for an enterprise value of $1.22 billion. It formally began a strategic review of its structure in March last year and subsequently committed to demerging the global DTZ property services business from its Australian-focused engineering activities.

The sale of DTZ, a business UGL built over a little more than a decade, will produce net proceeds of around $1bn for UGL when it settles in September, leaving the group effectively net debt-free and with around $350 million of net cash.

It is what UGL does with that cash that will interest the market. There’s already speculation that it might bid, alone or with partners, for the John Holland group and services businesses that Leighton Holdings’ new executive chairman, Marcelino Fernández Verdes, last week flagged could be sold.

That decision will probably be made by UGL’s new chief executive, former Tenix chief executive Ross Taylor, who will succeed UGL’s Richard Leupen in November.

It was Leupen who, from 2000, transformed UGL from a small West Australian resource industry construction business into a big player in construction, engineering and maintenance services – and built up the global property services business.

It was the success of that diversification, which included the 2011 acquisition of a then debt-ridden 200-year-old property services business, DTZ, for about $120m, which forced UGL’s hand.

It had two quite disparate businesses -- one global and growing and the other, largely Australia-focused -- under pressure from the downturn in the resources sector.

With DTZ’s peers like Jones Lang LaSalle and CBRE trading at premia of 50 to 60 per cent of the earnings multiples being applied to UGL, UGL took the view that there was substantial latent value to be unlocked by separating its two streams of activity, either via a demerger or a sale.

Once it began receiving approaches from third parties, and got the bidding up to an acceptable level, a clean sale was a simpler solution than a demerger. It's one that will give UGL more options to play with because of the transformation of its balance sheet. It has referred to both strategic acquisitions and capital management as possibilities once the sale has been completed.

The winding down of the resources boom and the stresses that have flowed through the sector as a result will create an opportunity to rationalise the sector. UGL will have the financial firepower to be a major player in that consolidation, should it choose to deploy it.

UGL believes the engineering market has stabilised and is in recovery mode ahead of an anticipated surge in infrastructure investment. As a focused engineering group with a pristine balance sheet and a strong existing pipeline of activity in its order book, it would be well-positioned to take advantage of any improvement in conditions.