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ACS: POSSIBLE SALE OF INDUSTRIAL SERVICES (ANÁLISIS BANCO SABADELL)

ACS has just announced it has received an indicative and non-binding offer by VINCI (DG) for its industrial division Cobra. The EV of the offer would total € 5.2 Bn, out of which € 2.8 Bn would be paid in cash minimum. The remaining amount could be paid in cash or VINCI shares (we assume this will be negotiated). At DG’s current levels, if ACS were to receive the remaining € 2.4 Bn in shares, it would hold a 5.86% stake in DG, becoming the second largest shareholder in the company (matching TCI’s position) after the employees (8.2% DG).
According ACS, its Board of Directors has decided to pursue the talks, and thus a diligence process for the assets to be sold will start. These assets would include the engineering businesses, 8 concessions in renewable energies and the development platform of new projects in the renewable energy sector. Zero-E and 15 concessions would not be included. The proforma sales of the assets included in the deal totalled € 6.3 Bn in 2019 (vs. € 6.53 Bn of the total Industrial division in 2019, 17% of ACS’ total).
We value the deal at an EV of € ~4 Bn (~25% of ACS’ EV), which means that the price paid would be +30% higher and represents additional +14% in our T.P. for ACS (currently € 29.19/sh.), while the market was assuming, according to our estimates, € ~3 Bn for this division. This explains the current +17% rise of the share price.
As for the NFD position, if the deal were to materialize (and assuming it will be fully carried out in cash), it would stand at € -300 M in 2020 including factoring and IFRS debt (around € -3 Bn excluding these factors).
After the deal, Construction would account for 82% of the company’s EBITDA, Concessions (including Abertis) 14% and Services +4%.
In principle, the operation is surprising, as we thought that Industrial Services was a strategic division for the company, although we welcome the price paid and also the fact that Zero-E (renewable assets) is not included in the deal.
Moreover, the operation would leave the company with a very strong financial and liquidity position against a backdrop of uncertainty regarding economic recovery over the next few months and years, which might also give rise to a number of moves, such as:
 It would leave the company in a favourable position to continue growing in the concessional segment coinvesting with Abertis (40% ACS net) or even to increase its stake in the latter if Atlantia was forced to make a divestiture in this regard (although in principle we believe this is more unlikely, the pressure from the Italian Govt. continues to weigh on this partner’s investment capacity). According to our estimates, the acquisition of up to 100% of Abertis would mean paying € 2.4 Bn, and would increase EPS’21e by +30%.
 The delisting of CIMIC (~80% held by Hochtief, which, in turn, is 50.4% held by ACS) or an increase in the stake in Hochtief might be considered as well. The delisting of CIMIC, assuming a +20% premium vs. the current trading levels, would mean paying €~825 M. Meanwhile, ACS would continue to search a partner for Cimic’s mining services subsidiary Thiess, an option that could mean cash inflows.
These deals would move in line with what the market appears to be requiring of ACS: a more simplified structure. This would at least help reduce the discount at which ACS is currently trading as a group (-25% vs. our valuation) and Hochtief (-25% vs. our valuation). Assuming the share prices of Hochtief and ACS, the market is pricing in that all ACS’s activities are trading at an implied P/E’21e of 7x vs. 11x in the valuation.
For DG, the eventual acquisition of ACS’ Industrial Division could be interesting from a strategic point of view (it would be carried out in one of the two most active divisions in M&A in the last few years). The deal would clearly increase Vinci Energies’ portfolio (28% DG’s sales and 12.5% EBITDA, the division comprising DG’s industrial construction activities), as the EBITDA of this division would increase by +65% (8.2% DG’s EBITDA), being accretive in EPS (>+9%).
On the financial level (assuming that the acquisition is made at € 5.2 M EV), the impact would be limited (~6.7% on Vinci’s EV) and its ND/EBITDA ratio would increase to levels of 2.9x (vs. 2.4x as of YE2019) if the amount was fully paid in cash. Alternatively, if the payment was made both in cash and in shares (the document released today stipulates that at least € 2.8 Bn should be paid in cash), then the ND/EBITDA ratio would stand at 2.7x (vs. 2.4x as of YE2019).