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Tetra Tech to acquire UK’s WYG

Logo - Tetra Tech_WYG

The Nasdaq-listed global consulting firm is set to acquire the UK project management and consultancy group in an all cash offer valuing WYG plc at £43.4m ($55m). The move gives Tetra Tech a springboard into the European environmental consulting and international development sectors.

According to Tetra Tech, the WYG board unanimously recommended its offer to acquire all outstanding shares of WYG for 55 pence per share, representing a 244% premium to the stock’s closing price of 16 pence at the end of last week.

With 1,600 staff primarily in the UK and Europe, WYG operates globally from over 30 locations across the UK, Europe, Africa and Asia. During the financial year ending March 2018, WYG recorded annual revenue growth of 1.7% to £154.4m ($196m) and operating profit of £3.5m ($4.4m) (EA 18-Jun-18). 

Tetra Tech chairman and CEO Dan Batrack said: "WYG advances our strategy to add firms that support our position as the premier global high-end consulting, engineering, and program management firm. WYG’s expertise in infrastructure and program management, as well as water and environmental services, enables us to deliver innovative solutions to support the UK’s infrastructure needs. Together, we will be able to provide an expanded scope of services to our customers and offer our combined staff even greater professional opportunities."

The target will also expand 18,000-strong, California-headquartered Tetra Tech’s geographic presence and enhance its international development business, in particular supporting the EU and the UK Department for International Development.

WYG chairman Jeremy Beeton said: "Becoming part of Tetra Tech brings the benefits of scale and access to broader expertise across highly complementary geographies and client relationships. It also brings the operational infrastructure and financial strength to support WYG’s long-term ambitions, whilst we provide Tetra Tech with a strong platform for growth in the UK and Europe. We believe the combination will provide greater opportunities for our people and our clients as well as offering certainty of immediate value to our shareholders."

Commenting to Environment Analyst, Andrej Avelini, president of investment banking and corporate advisory firm AEC Advisors said of the deal: "It appears to us that this is another platform acquisition for Tetra Tech. We advised on a couple of Tetra Tech M&A transactions in the past where they successfully made platform acquisitions: one in Canada (Wardrop) and one in  Australia (Coffey). Judging by those two deals, and other platform transactions like this, from the buyer’s perspective, it is an effective and efficient way to ‘enter’ a new geography. From the seller’s perspective a platform-seeking acquiror can offer more leadership opportunities and autonomy to the incumbent management team, which is an attractive proposition."  

An offer they can’t refuse

WYG has essentially advertised itself to potential suitors on and off ever since it was delisted from the London Stock Exchange and bailed out by its lenders back in 2010, as a result of mounting debt and the impact of recession. Industry commentators back then assumed its new owners would look to offload the firm as soon as it reached financial stability (EA 20-Jan-10).

It took four years for the finances to truly recover (EA 26-Jun-14), prompting shareholders to announce the firm was for sale in 2015 (EA 29-Jan-15). The next few months were marked by whispers and rumours about who would make the potentially risky move for this still-fragile consulting firm. WYG did attract interest, but as one insider told Environment Analyst recently some of the bids they received during that period were bordering on "offensive".

Late in 2015 WYG decided "the best route to optimise value for shareholders" was to secure and use a £25m loan facility with HSBC to make niche bolt-on acquisitions, and invest in enhancing capacity itself (EA 30-Jun-15). So over the last few years it has been business as usual for WYG, but it has always been open to the prospect of a sale.

In February, the rumour mill began again after the firm’s trading update issued a profit warning, blaming Brexit and the UK’s slowing construction industry for delaying key investment decisions - although it continued to see more robust conditions in its international development work. While lenders had for the most part been supportive up until now, the financial performance would make it impossible to meet its key financial covenants and negotiations began to secure a waiver (EA 19-Feb-19).

WYG directors were able to secure a waiver and formulated an 18-month plan to reduce staff numbers, consolidate offices and thin management. Smaller non-core business units were to be sold and a strategic assessment of WYG’s business priorities was to be undertaken. But before the plan – which required a "significant" up front cash cost funded by a secondary equity raising – was unveiled, in stepped Tetra Tech.

Put simply, Tetra Tech offered a way out for WYG’s shareholders after Brexit pulled the rug from under the firm’s recovery. Without the financial muscle to weather a potential sustained downturn in the construction industry – and with shareholders and covenants to placate – an 18 month cost-reduction strategy, during uncertain economic conditions, requiring a significant diminution of equity value, was a step too far. Particularly when that escape route was offering to buy shares at over three times market value was available and assume WYG’s legacy defined pension liabilities.

So it seems Tetra Tech made WYG an offer it couldn’t refuse.

That said, 55 pence per share for a company which only two years ago had a stock price of approaching 130p suggests Tetra Tech may have still bagged itself a bargain - particularly given the strong prospects for a number of WYG’s core sectors in the UK over the coming years, notably elate to housebuilding, urban regeneration, infrastructure and international development even in spite of Brexit (EA 20-Mar-19).  

Tetra Tech strategy

But the deal is not just about cash. Tetra Tech offers WYG a size and scale that can not only secure its future, but provide investment to allow it grow in Europe and further afield once more under its US parent. 

The 18,000-strong firm is ranked the second largest EC services provider worldwide by revenue in EA’s latest Global Market Assessment, with a 1,300-strong EC contingent, predominantly based in North America. Although historically US-focused, it has been building its international operations with a number of targeted M&A in recent years, notably in Australia where it acquired 3,300-strong Coffey (which similarly included a 300-strong EC contingent) (EA 28-Jan-16). It has since acquired two more Australian firms, the 160-strong EC consultancy Eco Logical (EA 11-Oct-17) and sustainable infrastructure engineering design specialist Norman Disney Young in 2018. In recent years the firm has also made a number of small acquisitions in Latin America.

Certainly the acquisition of WYG represents a significant step up for Tetra Tech in terms of its European EC opportunities where to date it has operated just ten offices (out of a global total of 360). Less than 3% of its EC services revenue is generated in Europe, and that is predominantly for US-based multinationals clients and US government clients in the region.

WYG will bring a 350-strong EC team, generating revenues of approximately £45m ($57m), to Tetra Tech’s own 13,350-strong contingent with total global EC revenues of $2bn in 2017.

The US firm reported "record" revenues of US$3bn and operating income of $190m last year, with activities segmented into a government services group (GSG) and a commercial/international services group (CIG) - accounting for 55% and 45% of revenues respectively (EA 13-Nov-18).

The WYG deal is expected to complete in July.

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