MGSM858 – Downer's Acquisition of UGL

MGSM858 Corporate Acquisitions
Target
UGL Limited
Acquirer
(ASX: UGL AU)
Downer EDI Limited (ASX: DOW AU)
Submitted By:
Francesco Scio
43839983
Harsha Gamaethige
42747023
Leyon Aponso
42022045
Qiao Nan Han
43507751
Sahil Virmani
41256433
Thomas Kak Hoo Chan 42545897
Contents
I.
Executive Summary .............................................................................................................................. 6
II.
Introduction............................................................................................................................................ 7
A.
Overview ........................................................................................................................................... 7
B.
Business and Product Portfolio ......................................................................................................... 7

1.
Downer Infrastructure .................................................................................................................... 7
2.
Downer Mining .............................................................................................................................. 8
3.
Downer Rail ................................................................................................................................... 8
C.
Strategy ............................................................................................................................................. 9
1.
Downers Purpose (Vision) ............................................................................................................ 9
2.
Downers Promise (Mission) ......................................................................................................... 9
III.
Macro Environment ......................................................................................................................... 11
A.
PESTLE Analysis ............................................................................................................................ 11
B.
Industry............................................................................................................................................ 12
1.
Major Domestic Players (ASX Listed) ......................................................................................... 12
2.
Key Trends and Drivers .............................................................................................................. 12
3.
Demand from Heavy Industry construction activities .................................................................. 12
4.
Competitive pressures ................................................................................................................ 12
5.
Cost pressures ............................................................................................................................ 13
6.
Optimism on Telecommunications Sector .................................................................................. 13
7.
Infrastructure, rail and mining services face lower demand ........................................................ 13
8.
Infrastructure ............................................................................................................................... 13
9.
Mining .......................................................................................................................................... 13
C.
Trends ............................................................................................................................................. 14
1.
IV.
Global Economy .......................................................................................................................... 14

SWOT.............................................................................................................................................. 15
A.
Strengths ......................................................................................................................................... 15
1.
Strength - Diversified Business Operations ................................................................................ 15
2.
Strength - Strong Customer Base ............................................................................................... 15
3.
Strength - Enhanced Solvency Position ...................................................................................... 15
B.
Weaknesses .................................................................................................................................... 15
1.
Weakness - Limited Liquidity Position ........................................................................................ 15
2.
Weakness - Overdependence on Australia ................................................................................ 16
C.
Opportunities ................................................................................................................................... 16
1.
Opportunity - New Contracts Wins .............................................................................................. 16
2.
Opportunity - Positive Outlook of NZ Construction Industry ....................................................... 16
D.
V.
Threats ............................................................................................................................................ 16
1.
Threat - Volatile Input Prices ....................................................................................................... 16
2.
Threat - Increase in Minimum Wages in Australia ...................................................................... 17
3.
Threat - Australian Construction Industry ................................................................................... 17
Acquisition Approach .......................................................................................................................... 17

A.
Motivation of M&A ........................................................................................................................... 17
B.
Explanation of potential target evaluation process ......................................................................... 19

1.
Target Shortlist - SWOT Analysis ............................................................................................... 19
2.
Target Screening and Scorecard Matrix ..................................................................................... 19
C.
Screening and Score card............................................................................................................... 21
VI.
Due Diligence .................................................................................................................................. 23
A.
Target and Acquirer's Financial Performance ................................................................................. 23
B.
Targets Quality of Earnings ............................................................................................................. 27
C.
Regulatory Matters .......................................................................................................................... 28
VII.
1.
Australian competition and consumer commission (ACCC) ....................................................... 28
2.
Australian stock exchange (ASX)................................................................................................ 30
3.
Legal Proceedings ...................................................................................................................... 30
4.
Corporate tax............................................................................................................................... 31
5.
Contracts ..................................................................................................................................... 31
6.
Other ........................................................................................................................................... 31
DD Scope Limitations ...................................................................................................................... 32
A.
Due Diligence Limitations ................................................................................................................ 32
B.
Reliance .......................................................................................................................................... 32
VIII.
Valuation ......................................................................................................................................... 33
A.
Target Valuation (UGL) ................................................................................................................. 35
B.
Management Control Valuation (UGL) ........................................................................................... 38
C.
Pre Synergy Valuation .................................................................................................................... 41
D.
Post Synergy Valuation (DOW-UGL) ............................................................................................ 42
IX.
Deal Structuring .............................................................................................................................. 47
A.
Strategic Takeover .......................................................................................................................... 47
B.
Initial Strategy + Bid ........................................................................................................................ 49

1.
Pre-Bid Acquisition ...................................................................................................................... 49
2.
Balance Acquisition ..................................................................................................................... 49
3.
Conditions of Bid ......................................................................................................................... 49
C.
Board Transition Arrangement ........................................................................................................ 50
D.
Implementation and Integration Planning ....................................................................................... 51
X.
Appendices.......................................................................................................................................... 57
A.
Appendix 1 Downer Business Portfolio Services ......................................................................... 57
B.
Appendix 2 Downer Business Portfolio Analysis BCG Matrix Analysis .................................... 59
C.
Appendix 3 Downers Purpose, Promise and Four Pillars ........................................................... 60

1.
Downers Purpose (Vision) .......................................................................................................... 60
2.
Downers Promise (Mission) ....................................................................................................... 60
3.
Downers Four Pillars ................................................................................................................. 60
4.
Group Business Strategy ............................................................................................................ 61
D.
Appendix 4 ...................................................................................................................................... 63
XI.
Downer Ltd. ..................................................................................................................................... 72
XII.
Summary ......................................................................................................................................... 74
XIII.
SWOT ANALYSIS NORTHPOWER LIMITED ............................................................................. 75
A.
Strengths ......................................................................................................................................... 76
1.
Strategic Capability ..................................................................................................................... 76
2.
Northpower provides design, construction and maintenance services for advanced
telecommunication networks, plant and equipment. ........................................................................... 77

3.
Geographic Diversity ................................................................................................................... 77
4.
Brand Equity ................................................................................................................................ 77
5.
Commitment to Safety / Environment ......................................................................................... 77
B.
Weaknesses .................................................................................................................................... 77
C.
Opportunities ................................................................................................................................... 78
1.
Capability Alignment ................................................................................................................... 78
2.
Northpowers transmission, telecommunications; and industrial and commercial capability is
strategically aligned to Downers Infrastructure division (Power, Telecommunications and E&I). ..... 78
3.
Market and Capability Development ........................................................................................... 78
4.
International Expansion ............................................................................................................... 78
5.
NZ SCIRT Rebuild ...................................................................................................................... 79
6.
NZs transmission infrastructure, construction and maintenance is completely outsourced by
Transpower. Northpower acquisition offers immediate and low cost market entry. ........................... 79
7.
Northpowers acquisition enables entry into NZ with secure, long term contracts to major
electricity providers. ............................................................................................................................ 79

D.
Threats ............................................................................................................................................ 80
XIV.
Background ..................................................................................................................................... 84
XV.
Operations and Revenue ................................................................................................................ 84
A.
Fixed Communications .................................................................................................................... 85
B.
Mobile Communications .................................................................................................................. 85
C.
Energy & Water ............................................................................................................................... 85
XVI.
SWOT Analysis ............................................................................................................................... 86
A.
Strengths ......................................................................................................................................... 86
B.
Opportunities ................................................................................................................................... 86
C.
Weaknesses .................................................................................................................................... 86
D.
Threats ............................................................................................................................................ 87
I.
Executive Summary
This report addresses details and analysis of potential acquisition of UGL Limited by Downer EDI. The
report further assess current position of both Target and Acquirer, their financial evaluation, analysis on
various Business and product portfolios, SWOT Analysis, revenue drivers and motivation of doing M&A..
Report looks at engineering services industry in Australia, key trends and drivers as well as some major
players operating within the industry. We have adopted a Top down approach by assessing macro
environment then due diligence to screen target company through a custom target matrix scorecard on
the basis of 10 most important M&A criteria's. Our Scorecard lists all potential targets which are best fit
for Downer EDI's strategic purpose and help us pick UGL Limited as the one aligns well with Downer's
business strategy. Through our research we have found Engineering Services Industry has low volatility,
stable growth but going through a transition phase mainly because of cost pressures due to a slowdown
in mining and resources investment in Australia.
Downer EDI strategic intent is to drive growth in its key markets and simultaneously assess further
business opportunities through acquisitions, strengthening its strategic capabilities and expanding into
Rail locomotive and Passenger train maintenance business etc. Report shows Downer should pursue
strategic acquisition because of its strategy to mitigate risks in economic downturn as well as grow
business through Challenging economic environment is reflective of Downer's growth options. Report
analyses due diligence from a regulators perspective to find out if it could trigger an evaluation from
ACCC for any anti-competitive effect on an industry. The analysis conducted has limitations and scope
of limitations include the review of publicly available information only
Report recommends Downer for a strategic takeover approach on UGL through creep or pre-bid
methodology where an initial acquisition of 20% could be considered followed by a scheme
recommendation of the directors at UGL.
II.
Introduction
A.
Overview
Downer EDI Limited provides engineering, construction and asset management services to customers in
the Minerals and Metals, Oil and Gas, Power, Transport, Telecommunications, Water and Property
sectors1. Downer employs approximately 19,000 people throughout its operations across Australia, New
Zealand, USA, Southern America, Asia-Pacific, Southern Africa and the UK. Headquartered in North
Ryde, New South Wales; Downer is listed on the ASX and NZX stock exchange under the ticker code
DOW. In 2014, Downer delivered total revenues of $7.38B, EBITDA of $298m and NPAT of $216m.
Over the previous three financial years, Downer has achieved positive NPAT growth2.
B.
Business and Product Portfolio

1.
Downer Infrastructure
Key Capabilities:
Road infrastructure
construction/maintenance
Electrical and instrumentation services
Power, transmission and electricity

services
Telecommunications and water

infrastructure consultancy services
Downer Infrastructure is one of the largest providers of engineering services in Australia and New
Zealand. The division employs approximately 8,500 employees in Australia and 5,000 employees in New
Zealand3. Downer Infrastructure has a market share of approximately 6.10% and the sector is forecasted
to experience strong market growth of 1.12% relative to Downers other business divisions 4 (refer to
Downer EDI Limited, 2014 Annual Report, http://www.downergroup.com/Resources/Documents/Investors/Financial-Results--
Reports/201314/Full-Year-Results/20140805-Annual-Report-2014.pdf, 2014, (accessed 10 May 2015).

2
IBISWorld Company Premium Report, Downer EDI Limited,
http://clients1.ibisworld.com.au.simsrad.net.ocs.mq.edu.au/reports/au/enterprisepremium/default.aspx?entid=7890 ,
2015,
(accessed 10 May 2015).

3

4
Appendix 2)
2.
Downer Mining
Key Capabilities
Open Cut Mining
Underground mining and exploration

drilling
Blasting Services
Mine reclamation and land

rehabilitation services
Downer Mining is a diversified mining contract services division which employs approximately 3,500
people across 50 sites in ANZ, PNG, South America and Southern Africa5. Downer Mining has a strong
market position with market share of 15.50%. The sector is forecasted to slow with a forecasted growth
rate of 0.90% per annum to 2020 (refer to Appendix 2) 6.
3.
Downer Rail
Key Capabilities
Provision, maintenance and overhaul

of passenger and freight rolling stock
Development of innovative solutions

for passenger cars, freight wagons,
locomotives and light rail
Downer Rail is a leading Australian rail transport solutions provider which employs approximately 1,400
people7. Although this sector is forecasted to contract by 0.23% per annum by 2020, Downer Rail has a
http://clients1.ibisworld.com.au.simsrad.net.ocs.mq.edu.au/reports/au/enterprisepremium/default.aspx?entid=7890,
2015,

5

6
2015,

7
high market share of 23.40% (refer to Appendix 2) 8. Downer has recently undertaken an operational
restructure and has expanded its operating divisions to five segments outlined in APPENDIX 1'
C.
Strategy
Downers strategy is articulated through its Purpose (Vision) and Promise (Mission) statements,
supported by the Four Pillars and is conveyed through Downers group business strategies and
objectives.
1.
Downers Purpose (Vision)9
We exist to create and sustain the modern environment by building trusted relationships with our public
and private sector customers.
2.
Downers Promise (Mission)10
To work closely with our customers to help them succeed, using world leading insights and solutions.
Downer supports its strategy with the Four Pillars (refer to APPENDIX 3):
1.
Safety
2.
Delivery
3.
Relationships
4.
Thought Leadership
In recent years Downer has developed key strategies to improve business performance through business
transformation, cost efficiencies and productivity in response to changing economic conditions and the
outlook for its end markets11. Furthermore, Downer has developed six strategic objectives which are
aligned to its Vision, Mission and Value statements12:

8
2015,

9
Downer Group, Our Purpose, Promise and Pillars, http://www.downergroup.com/About-us/Our-Purpose,-Promise-
and-Pillars.aspx,
10
and-Pillars.aspx,
11
2015, (accessed 1 May 2015).
2015, (accessed 1 May 2015).

12
Maintain Focus on Zero Harm
Continue to Drive Business Performance
Strengthen the Foundations of Downers Business
Drive Growth in Core Markets with Key Customers
Assess Alternative Growth Options
Simplify, Consolidate and enable the Downer Business
More specifically on the objective to Assess Alternative Growth Options, Downer intends to pursue
growth opportunities through potential M&As which may include bolt-on acquisitions, broadening of
capabilities, transformational mergers and/or geographical expansion 13. The M&A target must fit with
Downers strategic objectives, appropriately valued and structured to mitigate downside risks14. The
transaction must also ensure that Downer remains within its financing covenant and credit rating
metrics15. It should be noted that Downer is a highly experienced and capable M&A acquiring party that
has successfully completed an M&A transaction once every 2.3 years over the past 16 years.
13

14

15
III.
Macro Environment
A.
PESTLE Analysis
Political
Economic
Social
Technological
Legal
Environment
Stable Political
Real Household
Social media
Data transmission
Privatization of Power
Noise pollution
Environment
income to fall
steering
advancements such as
Industry
awareness increased
consumer
NBN
beliefs
Deregulation of many
Currency to fall
industries
More people
Energy industry transition
Construction and Power
Shortage of
will be living in
from centralised to
Industry heavily regulated
infrastructure capacity
cities than
decentralised
Potential for high tech
ACCC to police anti-
Climate change politics
manufacturing
competitiveness
constantly being
before
FIRB (Foreign
Interest rates to fall
Local
Investment Review
Board) being more
debated
generous
ASEAN alliance
Equity becoming
Social media
Developing economies
Global Tax Treaties to be
Greenhouse and
becoming stronger
more expensive
has global
lacking power and
reinforced
Carbon Emissions
effects,
technological
people are
infrastructure
awareness
now more
aware than
Global
before
Asian Investment and
Global economy
Increasing
BAZEL III being
World population to
Infrastructure Bank will
recovered beyond
travel lifestyle
implemented
reach 8 billion by 2020
present sovereign debt
post GFC and
opportunities
forecasted to
continue
B.
Industry
Engineering Services industry can be broadly defined as an Industry where companies are engaged in
engineering and infrastructure management services to the public and private rail, road, power,
telecommunications, mining and resources sectors. The industry has low volatility and very stable growth.
Over the past few years, companies have been able to take advantage of infrastructure construction
within the mining and energy sectors. Over the five years through 2014-15, industry revenue in Australia
is estimated to increase at a compound annual rate of 6.8%. In 2014-15, revenue is expected to increase
by 3.4% to reach $19.0 billion.
1.
16(IBIS
Report, 2014)
Major Domestic Players (ASX Listed)
Downer EDI, UGL Limited, Leighton Holdings, Transfield Services Ltd, Macmohan Holdings, Worley
Parsons and RCR Tomlinson.
2.
Key Trends and Drivers
Industry has been a big beneficiary of Mining boom over last decade. Over past 5 years Industry has
seen tremendous growth in Investment due to strong demand for resources which has fuelled the
investment. Demand has been driven by capital expenditure by state and federal government projects.
Engineering services Industry in Australia is very much fragmented with few players accounting for max
percent of market share. Substantial proportion of Infrastructure spending is supported by Local and State
Governments.
3.
Demand from Heavy Industry construction activities
Infrastructure maintenance services are highly correlated to construction spending. Overall capital
expenditure by state and local governments in construction within Australia has increased in last 5 years
from approx. $24 billion in 2007 to $35 billion in 2014-2015 (IBIS Report, 2014)17. However revenue for
Heavy Industry has fallen more recently due to lack of projects within resource and mining.
4.
Competitive pressures
There is continued persistence of highly competitive market. Contractors continue to move out of their
16IBISWorld
Company Premium Report, Downer EDI Limited,
http://clients1.ibisworld.com.au.simsrad.net.ocs.mq.edu.au/reports/au/industry/ataglance.aspx?entid=5330
17
http://clients1.ibisworld.com.au.simsrad.net.ocs.mq.edu.au/reports/au/industry/ataglance.aspx?entid=5330
prior core markets into new geographies and sectors to find work. As a result of the less favorable
competitive dynamics, Contractors are increasingly willing to bid more fiercely and accept higher levels of
risk and/or lower margins to win new work, which over time could introduce more business risk.
5.
Cost pressures
Despite the weakening in end market conditions, cost pressures remain an issue for the Contractors.
Contractors continue to carry more labor relative to current workloads (Potential for lay-offs). This reflects
a mix of factors including a shift from Resources and energy projects (more steel intensive) to economic
infrastructure (more heavy construction material intensive) continued. Cost pressure is principally due to
clients demanding leaner pricing, and heightened tendering pressure from smaller and offshore
competitors
6.
Optimism on Telecommunications Sector
Contractors became more optimistic on growth in the telecommunications sector. While the Federal
Governments reforms to the National Broadband Network are likely to lead to a reduction in the
proportional spending, the progress achieved in letting new work appears to be driving a more positive
outlook.
7.
Infrastructure, rail and mining services face lower demand
Quality of Infrastructure is a sign of nations prosperity and future growth. However there is higher level of
uncertainty surrounding the timing of new domestic infrastructure projects by the federal and state
governments. Growing uncertainty surrounding future economic conditions is serving to delay investment
in domestic transport and social infrastructure. The major short-term impact is due to slowing Chinese
economy which has resulted in low volume demand for domestic iron ore and coal and also in lower
commodity prices hence causing reduced demand for mining contractor services and rail freight rolling
stock maintenance. Sources
8.
Infrastructure
Infrastructure is a market with both local and global opportunities for Downer EDI. There is an estimated
US $8 trillion dollars which Asia will need to spend in order to maintain current levels of economic growth
comprised of $2.3 trillion in Roads, $1.1 trillion in Telecommunications, $4 trillion in Power and about
$400 billion in Water and Sanitation.18
9.
Mining
Mining is an industry that is subject to geopolitical and global macroeconomic issues. Locally, the leading
players in the heavy industry and non-building construction segment are Leighton Holdings (12.3 per cent
18
(PWC, 2014)
market share), and Downer EDI (7.5 per cent estimated market share).19 The 2014 PWC Aussie Mining
report recommends that smart M&A moves will be rewarded where approximately $3.5bn of assets have
been picked up by Mid-tier firms over 14 deals in the last 12 months.20 The mining industry will continue
to be challenged by price volatilities, geopolitical issues, rising costs and general mismatch of financing.
C.
Trends
1.
Global Economy
In the last 20 years China and India almost tripled their share of the global economy where the combined
total have already surpassed the US while also posing as the biggest risk to Australias economic
volatility. That being said, the US, UK and Japan remain Australias largest foreign direct investors at
$271.9 billion in Australia to December 2012. The Australian economy is undergoing transformation from
resource investment-led growth to broader sources of growth together with a restructure of Australian
workforce in conjunction with an overall decline in trade will see a slower Australian economy.
19
(Australian Government Department of Industry, 2014)
IV.
SWOT
A.
Strengths
1.
Strength - Diversified Business Operations
Downer has well-diversified operations that mitigate risks associated with overdependence on a single or
few segments. The company categorizes its business into three divisions, namely, Downer Infrastructure,
Downer Mining and Downer Rail. The company operates its Downer Infrastructure division in Australia
and New Zealand. Through Downer Mining division, the company offers contract mining and civil
earthmoving services. Its mining services include open-cut mining, underground mining and exploration
drilling, tyre management, blasting services, and sustainable development. Downer Rail division provides
and maintains passenger and freight rolling stock. Downer Rail division also has expertise in rail
signalling, security and safety solutions for passenger cars, freight wagons, locomotives and light rail. Its
presence in these three divisions also enables the company to serve a diversified customer base and
generate higher revenues.
2.
Strength - Strong Customer Base
Downer benefits from a diversified customer base, which mitigates the risks related to depending on a
single customer for a major share of its revenue. Downer Infrastructure division's major customers
includes Telstra, Foxtel and the NBN. The major customers of the Downer Mining division include
AngloGold Ashanti, Solid Energy, Fortescue, Idemitsu Australia Resources, Karara Iron Ore Project. Its
major freight rail customers comprise Pacific National, Genesee & Wyoming, BHP Billiton, Aurizon, SCT
Logistics and CFCLA. Wide customer base helps the company to overcome the over dependency on one
customer for major share revenue.
3.
Strength - Enhanced Solvency Position
The companys enhanced solvency position strengthens its ability to borrow and repay money. The
company recorded a debt-to equity ratio of 0.32 at the end of FY2014, while UGL Limited (UGL) and
Leighton Holdings Limited (Leighton) reported respective debt-to-equity ratios of 0.6 and 0.8. In FY2014,
the company recorded a 34.7% decrease in debt to A$470.8 million, compared with A$720.9 million in the
previous year. A strong solvency position indicates utilization of lower financial leverage and its
comparatively higher equity position, underlining the better creditworthiness of the company.
B.
Weaknesses
1.
Weakness - Limited Liquidity Position
Downer's current ratio was 1.2 in FY2014. This was lower than its close competitors, Ausenco Limited
and UGL, with respective current ratios of 1.5 and 2.2. This suggests that the company is less able to
meet its short-term obligations than some of its peers. At the end of 2014, the company had total current
assets worth A$2.1 Billion, a decrease of 15.7% over the previous year. The companys limited cash and
liquidity position puts it at a disadvantage when funding any potential opportunities in the market.
2.
Weakness - Overdependence on Australia
An overdependence on Australia for a large proportion of its revenues could be a concern for Downer in
the event of any political or economic adversity. The company generates 84% of its revenues from the
Australian, and with competitors such as Ausenco Limited and Brookfield Multiplex Limited already having
diversified geographical operations; the company is at a significant disadvantage. Any adverse political,
economic or climatic developments in the region could adversely impact the companys operations. A
further slowing of Chinese economic conditions impacting demand for iron ore, coal and liquid natural
gas, or LNG, would result in deferments, or potentially cancellations, of new mining and energy projects.
Increased financial instability across Europe could potentially limit the availability of debt funding for new
mining and energy projects, leading to further delays.
C.
Opportunities
1.
Opportunity - New Contracts Wins
The company's new contracts could help it enhance and strengthen its profitability. In February 2015, the
company received a contract to perform mining services for Fortescue Metals at the Christmas Creek
open cut iron ore mine in Western Australia. In the same month, Downer signed a Locomotive
Maintenance Agreement with Pacific National Pty Ltd for US$1 billion. Under this agreement the company
will provide a full suite of asset management services for over 300 Pacific National locomotives.
2.
Opportunity - Positive Outlook of NZ Construction Industry
Positive outlook for the construction market in New Zealand may provide new opportunities for Downer.
The New Zealand construction industry is expected to record a CAGR of 12.9% over 2015-2018 and
value NZ$75.5 billion by 2018. The commercial construction market is projected to record a CAGR of
14.3% by 2018, and growth in the commercial construction market will be supported by improving
business confidence, a contacting unemployment rate and strong economic conditions. Therefore, the
company may benefit from this growing market by gaining new contracts in New Zealand and increase its
revenue.
D.
Threats
1.
Threat - Volatile Input Prices
Downer may face an increase in its operating costs due to the volatility of input costs, especially raw
materials. Steel and cement prices are largely affected by the variable nature of iron ore and oil prices.
The price of global composite carbon steel increased from US$703 per ton in September 2013 to US$726
per ton in January 2014 before falling back to US$720 per ton in May 2014 and US$620 per ton in
January 2015. Average oil prices have also been variable. Prices have ranged from US$91 in 2013 to
US$58 per barrel in 2015 and again expected to increase to US$75 per barrel in 2016. This could hinder
the companys pricing strategies and reduce profit margins.
2.
Threat - Increase in Minimum Wages in Australia
Increasing minimum wage rates for employees in Australia may increase the costs for the company. The
Fair Work Commission announced that the new national minimum wage will be A$640.90 per week or
A$16.87 per hour compared to A$622.20 per week or A$16.37 per hour in 2013. Such initiatives from the
Australian government may increase the cost indirectly for Downer which in turn may affect its profitability.
3.
Threat - Australian Construction Industry
Australias construction sector is expected to decline over the next five years due to falling investment in
energy and utilities infrastructure and industrial construction, despite the government investments in
transport infrastructure and the flourishing housing market. The ABS reported in 2013-2014, Australias
private capital expenditure contracted by 3.9% and the mining, manufacturing, utilities, construction,
transport and warehousing sector is forecasted to decline through to 2015-201621. Timetrics Construction
Intelligence Center (CIC) expects Australias construction industry output to contract by an annual
average of 3.5% between 2015 and 2019. The main cause of the contraction will be the slowdown in the
mining sector, low investment in the energy sector, ambiguity over renewable energy targets, and political
headwinds.
V.
Acquisition Approach
A.
Motivation of M&A
Downers current and forecasted industry environment remains challenging. The level of competition is
intensifying, input costs and major market segments are experiencing high levels of demand and price
volatility, public capital expenditure is exposed to political headwinds, private capital expenditure is
subdued and the economic environment remains uncertain. The challenging market environment is
reflective of Downers growth options outlined in the companies Group Business Strategy.
21 Australian Bureau of Statistics (ABS) (2014) Private New Capital Expenditure and Expected Expenditure, online at
http://www.ausstats.abs.gov.au/ausstats/meisubs.nsf/0/E9CDEDAC48FFFC10CA257DF7000B716E/$File/56250_dec%202014.pdf (accessed 13 May 2015)
Continuous improvement of the Companys engagement with

customers, including working with them constructively to reduce
costs and improve productivity
Drive Growth
in Core
1
Leverage Cross Selling opportunities
Developing and growing Asset Management capabilities
Focus more closely on forward revenue opportunities, including

the outsourcing of road maintenance by State Governments,
Markets with
Key
Customers
large LNG projects and the NBN roll-out.
Expand into overseas markets selectively through existing

customer relationships
Continue to grow Downers Rail locomotive and Passenger train

maintenance businesses to replace revenue streams from
manufacturing contracts
Continue to achieve production and cost efficiencies in the mining

services business
Assess
Bolt-on acquisition
Alternative
Broadening of capabilities
Growth
Transformational merger
Options
Geographical expansion
As Downer continues to mitigate economic downturn risks by diversifying its market reach and customer
base with large corporate accounts and a healthy balance sheet; we recommend Downer pursue
business growth via a strategic acquisition with objective criteria:
M&A Objectives
-
Leverage cross selling opportunities through target customer base.
Grow the Downer Rail locomotive and Passenger train maintenance business.
Target is strategically aligned and will result in immediate increase in market share.
Strengthen and / or broaden strategic capability.
Increase shareholder value from Year 2 onward.
The target acquisition shall undertake a rigorous evaluation process from a commercial, financial
and legal perspective and the Target shall be appropriately valued based on a full takeover.
B.
Explanation of potential target evaluation process
The potential target acquisition evaluation process consists of a two stage process:
1.
Target Shortlist - SWOT Analysis
Potential targets from a diverse range of industries and geographic markets are selected for screening
evaluation. The six potential targets consist of both ASX listed and private companys located in Australia
or New Zealand. The potential targets are initially screened according to Downers broad growth strategy
options, company culture and value alignment. A detailed SWOT analysis for each potential target was
conducted as per Appendix (Individual Assignments)
2.
Target Screening and Scorecard Matrix
Downers vision and mission statements, four pillar statements, business segments and group business
strategy is reviewed. Downers macro-environment is analysed via a PESTEL model and the competitive
and industry trends are analysed to identify environmental opportunities and risks. Furthermore, a
situational analysis (SWOT) is conducted on Downers business; and business growth by acquisition is
identified as an effective growth strategy. The screened targets are evaluated against a scorecard with 10
acquisition criterias. The acquisition criteria's developed based on alignment to Downers overall
business strategy and M&A objectives. The target candidate with the highest overall score is selected as
the acquisition Target.
10 acquisition criterias
Market Share
Target Market alignment
Capability alignment
Capability development
Cross sales opportunity
International expansion
Share registry accessibility
Revenue Growth rate
Profit (EBITDA / Revenue Ratio)
Leverage (Debt / Equity Ratio)
The overall scores from the matrix and an explanation of the acquisition criteria is shown in Part C. Based
on the scorecard matrix UGL Limited, an outsourced engineering and asset management and
maintenance services company is selected as the suitable acquisition Target.
C.
Screening and Score card
TARGET SCREENING MATRIX
M&A TARGETS
Transport
Asciano/ Pacific
ACQUISITION CRITERIA
National Rail Division
Utilities
Ausnet
Road /
Resources /
Infrastructure /
Energy /
Materials
Infrastructure
Northpower
Limited
Telecommunicati
Rail / Transport /
ons / Utilities
Utilities / Defence
RCR Tomlinson
Service Stream
UGL Limited
Market Share
Target market alignment
Capability alignment
Capability development
Cross sales opportunity
International expansion
Share registry accessibility
Revenue Growth Rate
39
43
44
54
37
67
Profit (EBITDA/Revenue
Ratio)
Leverage (Debt to Equity
Ratio)
TOTAL SCORE:
NOTES:
Market Share (0 to 10) - A strategic acquisition objective is to increase market share above organic growth via the acquisition. Low industry market share = 0 score rating; High industry market share = 10 score rating.
Target Market Alignment (0 to 10) - Target's market sector alignment to Downer's growth based business units as per BCG Matrix. No market sector alignment = 0 score rating; Full market sector alignment = 10 score rating.
Capability Alignment (0 to 10) - Target company's product / service offerings alignment to Downer's current product / service offering. No product / service alignment = 0 score rating; Full product / service alignment = 10 score rating.
Capability Development (0 to 10) - Target company's product / service offering can offer increased breadth or depth in Downer's product / service capability to customers. No new capability development = 0 score rating, New capability development = 10 score rating.
Cross sales opportunity (0 to 10) - Downer's product / service mix can potentially be offered to Target company or Target company product / service mix can be offered to Downer. Low product / service cross sales opportunity = 0 score rating;
High product / service cross sales opportunity = 10 score rating.
International expansion (0 to 10) - Target acquisition shall result in geographic market expansion in product or service market. Low international expansion probability = 0 score rating, High international expansion probability = 10 score rating.
Share registry accessibility (0 to 10) - rating based on Downer's ability to acquire shares of target through listing. Private ownership / difficult to access shares = 0 score rating; Open publicly listed share access: 10 score rating.
Revenue growth (0 to 10) - rating based on sales / revenue performance of the Target company over the past 3 years. Decline or Low revenue growth = 0 score rating, High Revenue growth = 10 score rating and unknown = 0 score rating.
Profit (EBITDA) (0 to 10) - based on the current profitability of the Target company. Loss or Low profit = 0 score rating, High profit = 10 score rating, unknown profit = 0 score rating.
Leverage (Debt to Equity) (0 to 10) - Target companies debt leverage on its balance sheet. High levels of debt to equity ratio (>1:0) = 0 score rating, Low levels of debt to equity ratio (<1:0) = 10 score rating, unknown = 0 score rating.
VI.
Due Diligence
A.
Target and Acquirer's Financial Performance
Downer EDI
During last five years (2010-2015) Downer's Historical Guidance versus Actual reported numbers have
not been in line since company has underestimated their Net Income Adjusted but reported a higher
number. Despite the Tenix acquisition, Downer is in solid financial health as the result of additional equity
raising in 2011, and the AUD 147 million sale of CPG Asia consulting business, and strong capital
management. Downer ended first half fiscal 2015 with net debt of AUD 243 million which is an increase
because of Tenix Acquisition. Operating cash flow remains buoyant. The company has forecast capital
expenditure of less than A$300 million during fiscal 2015. During fiscal 2013, Downer commenced paying
dividends to shareholders again, after stopping in fiscal 2010.
Ratios
2014
2013
2012
2011
2010
1.32
1.29
1.14
1.16
1.21
497.7
554.6
270.9
254.5
312
0.24
0.39
0.38
0.51
0.72
46.64%
50%
0%
0%
49.22%
1.82
2.1
2.03
1.8
1.71
Days in Inventory
35.71
24.73
20.34
20.43
23.24
Days Receivables
67.09
64.74
67.08
70.73
73.36
Days Payables
52.87
52.84
64.12
61.53
62.18
49.07%
46.84%
46.12%
46.45%
47.20%
Operating Margin
4.63%
4.09%
3.30%
0.06%
1.22%
Net Profit Margin
2.81%
2.24%
1.22%
-0.88%
0.05%
Return on Assets
5.53%
4.89%
2.75%
-1.29%
0.09%
EBIT Margin
4.64%
4.43%
4.34%
4.41%
5.53%
12.06%
12.72%
7.14%
-4.86%
0.27%
Financial Strength
Current Ratio
Working Capital
Total Debt/Total Equity
Payout Ratio
Efficiency
Asset turnover
Profitability
Gross Margin
Return on Equity
Source: Morningstar
UGL Limited
UGL's underlying earnings have been lower than guided earnings and company has missed its historical
guidance net income numbers versus actual reported during last 5 years. UGL has not been able to meet
its own expectations. Balance sheet has deteriorated mainly because of cash outflows from Ichthys
project and potential abnormal impairment costs. UGL has Poor future cash-flow and no dividend with
$175m of cash-flow guided to walk out the door because of Ichthys project. In company presentation in
1H 15, highlighting the extent of the issue is that the dividend has been suspended, with UGL stating,
Reinstatement of dividends is unlikely until underlying earnings have normalised and it is considered
appropriate in the context of UGLs capital requirements and outlook.
As at June 2014:
*Liabilities Held for sale are included in the balance sheet. Hence when comparing with the revenue you
need to exclude them.
As at December 2014:
*DTZ was sold for $1.2mm. Profit on sales was $64mm and out of the proceeds $0.489m was distributed
to shareholders and $706mm was used to settle all the long term debt and a part of US notes (@ the
Interest rate 6.62%).
*Provision recognised for the Ichthys Combined Cycle power Plant project $175million
*Impairments Associated with a sustained slowdown in the resources sector $78mm
Ratios
2014
2013
2012
2011
2010
Current Ratio
2.18
1.38
1.42
1.46
1.45
Working Capital Turnover
1.65
22.44
26.4
38.51
101.85
Total Debt/Total Equity
0.64
0.7
0.53
0.36
0.46
0%
70.47%
69.12%
73.45%
73.41%
0.62
0.67
1.71
1.74
1.66
Days in Inventory
184.29
227.78
112.65
108.43
93.51
Days Receivables
88.4
117.68
43.43
38.43
41.37
65.41
52.38
42.1
43.39
45.69
63.46%
70.05%
72.88%
71.38%
69.86%
Operating Margin
0.89%
0.15%
4.85%
5.44%
Net Profit Margin
1.51%
0.52%
3.02%
3.70%
3.45%
Return on Assets
1.08%
0.46%
5.19%
6.46%
5.71%
EBIT Margin
6.32%
6.37%
6.03%
6.37%
6.03%
Return on Equity
6.40%
8.23%
14.39%
13.60%
12.48%
Financial Strength
Payout Ratio
Efficiency
Asset turnover
Days Payables
Profitability
Gross Margin
Source: Morningstar
5.14%
B.
Targets Quality of Earnings
UGL's revenue from engineering services for resources sector (including operations and maintenance)
has surprised on an upside and increased significantly from $773 mil in 2010 to $2.26 bil in 2014 which is
a jump of approx. 31% (annualized). Similarly revenue from infrastructure services has increased approx.
55% annualized during the same period. However Rail services have had negligible contribution to overall
revenue in last few years. UGL's reported earnings (Sales and EPS Adjusted) have consistently fallen
short of analysts' estimates from 2010 as per Bloomberg Consensus number. Given this stable nature of
UGL's revenues, cost cutting and restructuring undertaken in FY14 and 1H15 has led to improve margins
for longer term without impacting companys revenue generating abilities.
Diversity in UGLs earnings provide a balance to the ongoing contraction in resources capital expenditure,
however serious contract issues, impairments loss from Ichthys power plant in Darwin led UGL to
withdraw its dividend payout to investors in 2015. Post sale of loss making DTZ (group's property services
division) for $1.2 billion in 2014 UGL has reduced its debt and improve capital structure.
C.
Regulatory Matters
1.
Australian competition and consumer commission (ACCC)
Downer EDI take over process on UGL Ltd may have trouble overcoming the evaluation and then the
positive assessment by Australian Competition and Consumer Commission as regards the Railway
Equipment Manufacturing and Repair sector where UGL Ltd has a leading market position with an
estimated market share of 37.90% while Downer Rail combined with their joint venture partners, Keolis
Downer, Bombardier and Hitachi holds 23.4% market share in the sector, which means that once the
acquisition took place, they could represent a share of 61.3% and have a majority to influence a highly
strategic market for the Australian government going to condition the pricing policy.
Downer has secured major maintenance contracts including Yarra Trams in Melbourne and Gold Coast
Light Rail22. UGL has manufactured rolling stock for New South Wales' RailCorp. The company has
completed stages one, two and three of the Outer Suburban Railcar project. NSW Government has
named UGL as the preferred operator for the $8.3 billion North West Rail Link. Besides, they could raise
barriers to entry into the Australian Railway Equipment Manufacturing and Repair market by removing the
other competitors. In fact, we must add that this sector is highly concentrated and moreover the
company's industry segment revenue is expected to decline at an annualised 2.4% over the five years.
Based on ACCCs post-merger market share notification threshold of 20% 23, Downers acquisition of UGL
would trigger concern for anti-competitive effects in the Australian Rail sector. As a risk mitigation to
alleviate concerns in breaching the Competition and Consumer ACT 2010, it is advised that Downer
engage with the ACCC through an informal, confidential clearance process prior to proceeding with
acquisition process.
22
http://clients1.ibisworld.com.au.simsrad.net.ocs.mq.edu.au/reports/au/enterprisepremium/default.aspx?entid=7890, 2015, (accessed

23 May 2015).
Table: Downer / UGL - PRE and POST Acquisition Market Share
Market Share
Industry Segment
Railway Equipment Manufacturing and Repair in
Downer
UGL
EDI24
Limited25
Downer /
UGL Post
Merger
ACCC
Notification
Threshold
(>20%)
23.40%
37.90%
61.30%
Yes
6.10%
3.00%
9.10%
No
0%
<1%
<1%
No
<1%
<1%
<1%
No
Road and Bridge Construction in Australia
<1%
<1%
<1%
No
Site Preparation Services in Australia
0%
<1%
<1%
No
Electrical Services in Australia
<1%
<1%
<1%
No
Engineering Consulting in Australia
<1%
<1%
<1%
No
0%
<1%
<1%
No
15.50%
0%
15.50%
No
Australia
Heavy Industry and Other Non-Building
Construction in Australia
Structural Steel Fabricating in Australia
Commercial and Industrial Building Construction
in Australia
Heavy Machinery Repair and Maintenance in

Australia
Contract Mining Services in Australia
24

23 May 2015).
25
IBISWorld Company Premium Report, UGL Limited,

24 May 2015)
2.
Australian stock exchange (ASX)
Continuous disclosure
On the 6th November, 2014 UGL announced to the ASX that a Joint Venture led by CH2M Hill recognised
a provision of $175m to the Ichthys CCPP project as a result of project changes in the design and
procurement phase of the project26. On the 10th November, 2014 the ASX queried UGL regarding the
timing and disclosure of this information to the market as concerns were raised that the information would
have a material effect on the price and value of the entitys securities as the stock price dropped by 3.3%
shortly after the announcement27. UGLs response to the ASXs query reveals that UGL was notified of a
planned review by its JV partner of the CCPP project in October, 2014 which would result in a potential
project write-down28. Further to this concern, UGL did not clarify if it was aware of a filing to the US SEC
by CH2M Hill in August, 2014 which warned of a potential write-down of liquidated damages to be
assessed against the JV due to the project delays.Downers acquisition of UGL may be impacted by
potential legal implications from the ASX due to a potential breach of continuous disclosure rules.
3.
Legal Proceedings
Further to the continuous disclosure concerns on the Ichthys CCPP project, UGL was notified of legal
proceedings filed against the Company on the 1st April, 2015 by a Shareholder Group in the Supreme
Court of Victoria on behalf of Melbourne City Investments Pty Ltd (MCI). MCI alleges loss and damages
arising from UGLs market disclosure regarding the Ichthys CCPP project 29.
Although UGL intends to vigorously defend these proceedings and a financial provision of $175m shall be
booked against the companys balance sheet from 2H 2015 to 1H 2017; UGL is exposed to potential
claims for legal compensation or settlements due to a potential breach of Continuous Disclosure rules.
26
ASX, Company Announcements for UGL Limited
http://www.asx.com.au/asxpdf/20141110/pdf/42tm5wmpfk33jx.pdf ,
27
SMH, UGL aware of potential write-downs in October, http://www.smh.com.au/business/ugl-aware-of-potential-
writedowns-in-october-20141110-11jy0i.html,
28
2014 (accessed 24 May 2015).
ASX, Company Announcements for UGL Limited
http://www.asx.com.au/asxpdf/20141110/pdf/42tm5wmpfk33jx.pdf ,
29
2014 (accessed 24 May 2015)
ASX, Company Announcements for UGL Limited, http://www.asx.com.au/asxpdf/20150402/pdf/42xp8snzjslsbj.pdf,
4.
Corporate tax
As UGL Limited is listed on the ASX and the companys registered head office address is in Sydney,
Australia; UGL Limited is regulated under Australian taxation laws and this will remain unchanged post
acquisition by Downer. Furthermore, Downer and UGLs average effective annual tax rates over the past
10 years have been similar. Downers average effective tax rate is 24% whilst UGLs average effective tax
rate is 23%. This implies that the post-merger acquisition impact on Downers tax rate will be minimal with
a transitional integration plan.
5.
Contracts
UGLs customer order book consists of a diverse mix of delivery structures and varying relationships that
are used to provide UGLs services to their clients. The delivery structures include contracts held via Joint
Ventures, Alliances, Main Contractor and Sub-Contractor arrangements. Order book contracts require
detailed due diligence during the Due Diligence / Data Room stage of the M&A process as this
information is not available publically. Significant due diligence attention on the Change of Ownership
clauses resulting from an acquisition is required, particularly with UGLs Joint Venture and Main
Contractor contracts as these two delivery structures consists of 88% of the order book arrangements30.
Figure 1: UGL Limited - Half Year 2015 Results Presentation
6.
Other
The below represents outstanding due diligence matters that are exclusively available upon request to
30
UGL, Half Year 2015 Results Presentation,
http://www.ugllimited.com/Asset/cms/ASX_announcements/2015/February/Half_Year_2015_Results_Presentation_FINAL.pdf,
2015, (accessed 24 May 2015).
UGL during the confidential Due Diligence / Data Room stage of the M&A process:
Equity and Debt agreements
Intellectual Property
VII. DD Scope Limitations

This report and in particular, its due diligence section is a review of publicly available information and
attempts to address matters as indicated in the assessment criteria of the Group Report Assignment for
MGSM858 Corporate Acquisitions
This report has based its specific findings and references to DOW, UGL and the industries for which
these companies perform in primarily around:
1.
Publicly available information Financial Reports, ASX Announcements
2.
Industry and Economic Commentary and Opinions Bloomberg, IBIS, Morningstar and Various
References
3.
Public Institution Reports Government commissioned reports and forecasts
A.
Due Diligence Limitations
Due to the limited information that is available about the quality of both companys revenue and cost
structure, assumptions using industry metrics (as provided by IBIS reports etc) were used as a reference
for valuation and quality of earnings analysis. Specific information in relation to DOW and UGL is
assumed to become available once CAs and an initial term sheet around the proposed deal is signed.
Additionally, an off-market acquisition for a minority shareholding of the company in conjunction with a
seat on the board will provide more detail and clarity around the company that due diligence may not be
able to pick up.
B.
Reliance
This report is purely informational and for discussion purposes only where it has been prepared solely for
the purposes of completing a group assignment under the MGSM858 Corporate Acquisitions.
As instructed, the group has agreed to make this report available for DOW to view, but we have not
specifically addressed or considered any matters that may arise from DOW or a person who has read this
report. Nothing in this report can be relied upon, nor is any group member (or any of its authors) are liable
for the accuracy of this report.
VIII. Valuation
Assumptions
Description
2015 TENIX
In FY2015, the acquisition impacts to DOWs balance sheet has been incorporated as an
ADJUSTMENT
adjustment in financial forecast model. The net impact equates to $452m increase to DOW total
asset base.
Revenue growth rate is based on segmented industry growth rates between FY2015 to FY2020.
The industry is segmented in accordance to:
Heavy Industry and Other Non-Building Construction
Road and Bridge Construction
Electrical Services
Engineering Consulting
Contract Mining Services
Railway Equipment Manufacturing and Repair

These segmented industry growth rates are averaged and applied to DOWs FY2014 revenue and
forecasted through to FY2025 and Terminal Years.
OPERATING
Current actual rate maintained from FY2014 and forecasted through to FY2025 and Terminal
EXPENSES/REVENUE
Years.
DEPRECIATION RATE
(DEPRECIATION/NON-
Years.
CURRENT ASSETS)
CURRENT ASSETS /
REVENUE
Years.
NET NON-CURRENT
ASSET / REVENUE
Years.
CURRENT AND
OTHER LIABILITIES /
Years.
OPERATING
EXPENSE
INTEREST RATE ON
DEBT
Years.
DIVIDEND PAYOUT
DOWs current dividend payout ratio is 44% of NPAT. This is forecasted to increase by 1% p/a
RATIO
through to FY2020 to 50% which is maintained till FY2025 and Terminal Year.
TAX RATE
Current effective tax rate is 28% and this is forecasted to normalize to Australias Corporate tax
rate of 30% from FY2015 through to FY2025 and Terminal Year.
A.
Target Valuation (UGL)
ASSUMPTIONS
DESCRIPTION
ICHTHYS PROJECT
Project write down of $175m over three years from FY2015 to FY2017. $59m impairment
PROVISION
in FY2015, $78m in FY2016 and $38m in FY2017. This project write down is in
accordance to forward guidance provided by UGLs CEO.
RESTRUCTURING
FY2015 restructuring costs of $36.7m related to the retrenchment and entitlement payout
COSTS AND SAVINGS
for 200 employees. In addition, $33m in cost savings are forecasted to be realized from
FY2015 through to FY2020 and Terminal Year.
PROPERTY
FY2015 property consolidation cost of $74m as mentioned in the .
CONSOLIDATION
WIP REDUCTION
UGLs strategic initiative to improve the companys cash position through WIP
improvement has been incorporated into balance sheet of FY2015 through to
FY2025/Terminal Year. The WIP improvement is $87m p/a.
DTZ DIVESTMENT
Balance sheet impact of $1.6bn in FY2015. The total asset base was decreased by the
total value of $1.6bn. In addition, current liabilities has been reduced by $628m and long
term debt has been repaid by $462m in FY2015 as a result of the DTZ sale. A share
buyback of $490m was also executed within the same year.

REVENUE GROWTH
Revenue growth rate is based on segmented industry growth rates between FY2015 to
RATE
FY2020. The industry is segmented in accordance to:

Electrical Services
These segmented industry growth rates are averaged and applied to DOWs FY2014
revenue and forecasted through to FY2025 and Terminal Years.
OPERATING
Current actual rate maintained from FY2014 and forecasted through to FY2025 and
EXPENSES/REVENUE
Terminal Years.
DEPRECIATION RATE
(DEPRECIATION/NON-
Terminal Years.
CURRENT ASSETS)
CURRENT ASSETS /
REVENUE
Terminal Years.
Note: FY2015 higher current asset / revenue ratio of 127% is recorded as the figure
refers to a significant event in the balance sheet from the DTZ divestment. i.e. the
current assets includes DTZs assets whereas the revenue reduction from DTZs sale
has been recognized in FY2015.
NET NON-CURRENT
ASSET / REVENUE
Terminal Years.
CURRENT AND
OTHER LIABILITIES /
Terminal Years.
OPERATING
EXPENSE
Note: FY2015 higher current and other liabilities / revenue ratio of 64% is recorded as
the figure refers to a significant event in the balance sheet from the DTZ divestment. i.e.
the current and other liabilities includes DTZs liabilities whereas the Operating Expense
reduction from DTZs sale has been recognized in FY2015.
INTEREST RATE ON
DEBT
Terminal Years.
DIVIDEND PAYOUT
DOWs current dividend payout ratio is 65% of NPAT. This is forecasted to increase by
RATIO
1% p/a through to FY2020 to 70% which is maintained till FY2025 and Terminal Year.
TAX RATE
Current effective tax rate is 18% and this is forecasted to normalize to Australias
Corporate tax rate of 30% from FY2015 through to FY2025 and Terminal Year.
Note: significant tax benefit is received in FY2015.
B.
Management Control Valuation (UGL)
ASSUMPTIONS
DESCRIPTION
ICHTHYS PROJECT
Project write down of $87.5m over three years from FY2015 to FY2017. The project write
PROVISION
down is forecasted to be reduced by 50% under DOWs management compared to

UGLs management. Therefore an impairment of $29.5m impairment in FY2015, $39m in
FY2016 and $19m in FY2017.
RESTRUCTURING
FY2015 restructuring costs of $36.7m related to the retrenchment and entitlement payout
COSTS AND SAVINGS
for 200 employees. In addition, $33m in cost savings are forecasted to be realized from
FY2015 through to FY2020 and Terminal Year.
PROPERTY
FY2015 property consolidation cost of $74m.
CONSOLIDATION
WIP REDUCTION
UGLs strategic initiative to improve the companys cash position through WIP
improvement has been incorporated into balance sheet of FY2015 through to
FY2025/Terminal Year. The WIP improvement is $87m p/a.
DTZ DIVESTMENT
Balance sheet impact of $1.6bn in FY2015. The total asset base was decreased by the
total value of $1.6bn. In addition, current liabilities has been reduced by $628m and long
term debt has been repaid by $462m in FY2015 as a result of the DTZ sale. A share
buyback of $490m was also executed within the same year.
REVENUE GROWTH
Revenue growth rate is based on segmented industry growth rates between FY2015 to
RATE
FY2020. The industry is segmented in accordance to:

Electrical Services
These segmented industry growth rates are averaged and applied to DOWs FY2014
revenue and forecasted through to FY2025 and Terminal Years.
OPERATING
Operating expenses are forecasted to reduce by 1.3% to revenue. This assumption is
EXPENSES/REVENUE
based on the successful execution of DOWs strategy to right size their business and
the achievement of total expense reduction of 16.5% whilst total revenue declined by
15.3%. Furthermore, a conservative safety factor of 80% was applied to the operating
expense rate of 1.3%.
DEPRECIATION RATE
(DEPRECIATION/NON-
Terminal Years.
CURRENT ASSETS)
CURRENT ASSETS /
REVENUE
Terminal Years.
Note: FY2015 higher current asset / revenue ratio of 127% is recorded as the figure
refers to a significant event in the balance sheet from the DTZ divestment. i.e. the
current assets includes DTZs assets whereas the revenue reduction from DTZs sale
has been recognized in FY2015.
NET NON-CURRENT
ASSET / REVENUE
Terminal Years.
CURRENT AND
OTHER LIABILITIES /
Terminal Years.
OPERATING
EXPENSE
Note: FY2015 higher current and other liabilities / revenue ratio of 64% is recorded as
the figure refers to a significant event in the balance sheet from the DTZ divestment. i.e.
the current and other liabilities includes DTZs liabilities whereas the Operating Expense
reduction from DTZs sale has been recognized in FY2015.
INTEREST RATE ON
DEBT
Terminal Years.
DIVIDEND PAYOUT
DOWs current dividend payout ratio is 65% of NPAT. This is forecasted to increase by
RATIO
1% p/a through to FY2020 to 70% which is maintained till FY2025 and Terminal Year.
TAX RATE
Current effective tax rate is 18% and this is forecasted to normalize to Australias
Corporate tax rate of 30% from FY2015 through to FY2025 and Terminal Year.
Note: significant tax benefit is received in FY2015.
C.
Pre Synergy Valuation
(Acquirer DOW and Target Control UGL) Forecast Assumptions

The pre-synergy forecast model assumes that the assumptions outlined in the Acquirer DOW forecast model and the Target Control UGL
forecast model remains unchanged. These two models are merged into a single Profit and Loss, Balance Sheet and FCFE forecast to FY2025
and Terminal Year without the inclusion of synergies.
D.
Post Synergy Valuation (DOW-UGL)
SYNERGY
ID
(REVENUE AND
FINANCIAL
ASSUMPTION
VALUE
COSTS)
1.
STATEMENT
IMPACT
UGL - ORDER
The Revenue to Order Book value
Increased
P/L =
BOOK
demonstrates the sales conversion
revenue by
Revenue
CONVERSION
efficiency for each company. DOWs FY14
6% of
increase of
revenue / order book value = $7.378bn /
combined
$575m or 6%
$18bn = 41%, whereas UGLs FY14
entity or
p/a.
revenue / order book value = $1.839bn /
$575m.
$9.639bn = 19%. Post-acquisition

assumption that UGLs order book
conversion can be increased by 33% from
19% to 25% Revenue to Order Book ratio
based on DOWs tendering and project
execution capabilities.
2.
DOW / UGL
DOW has diversified its revenue mix
5% above
P/L = UGL
CROSS AND
across geographic segments in
UGL
Revenue
INTERNATIONAL
comparison to UGL. In FY14 DOWs
revenue
increase from
SALES.
international markets revenue comprised
growth rate
FY15-FY20
of 17.6% of revenue whereas UGLs
from YR1-5
of 5%, FY21
comprised of 2.6% of total revenue. Post-
and taper
of 4%, FY22
acquisition assumption that DOW can
down to 3%
to Terminal
enable UGL to increase international
from YR6-
Value of 3%.
revenue via DOWs existing sales channel
Terminal
integration and customer network.
Year with a
1% reduction
p/a.
3.
CULTURAL AND
DOW and UGLs managerial capability and
Decrease in
P/L =
MANAGERIAL
company culture differ due to their project
revenue per
Combined
ALIGNMENT
specialisation and respective core
employee of
revenue per
COSTS
competitive advantages. DOW possesses
1% in FY15,
employee
strong capability in large scale construction
0.5% in
reduction of
and maintenance projects such as road,
FY16 and
1% in FY15,
highways and utility plant construction and
0.25% in
0.5% in FY16
maintenance. Although UGLs managerial
FY17.
and 0.25% in
capability is aligned in this sector, it is also

competitive in managing and delivering
large complex projects such as NSWs
passenger train network (North West Rail
Link).
The difference in managerial capability and
FY17.
company culture in terms of managing

simpler large projects vs large technical
projects is expected to impact negatively
on the productivity of the post-acquisition
DOW/UGL company.
This is measured as a reduction in revenue

per employee.
4.
STAFF
Employees / Head count shall be reduced
Redundancy
P/L operating
RETRENCHMENT
by 770 employees or 7% of UGLs
payment of
expense
workforce post acquisition. The
4% in FY15,
decrease of
retrenchment is associated with the
then 3% in
$35m in
removal of middle office and back office
FY16.
FY15 and
duplication across the DOW and UGL
$62m in
business. Redundancy cost calculated on
FY16 and
3 months of average annual salary.
$67m from
Redundancy cost of $8m in FY15 and $6m
FY17
in FY16. FTE cost savings based on
onwards.
removal of full year FTE labour costs of

$110,000 per employee.
5.
FUNDING COSTS
DOW and UGLs merged balance sheet
Interest rate
P/L interest
provides greater funding capacity due to
reduction to
rate debt to
the size and scale of the post-acquisition
3% for
be reduced
business. DOWs current effective interest
combined
to 3% for
rate is 7% of total debt and UGLs effective
entity.
Post-synergy
interest rate is 3% of total debt. By merging
DOW/UGL.
the two entities, DOW and UGL is

estimated to refinance is debt structure to
UGLs lower interest rate debt of 3%. The
refinanced interest rate will be applied to
the merged entity.
6.
PROPERTY,
DOW and UGL operate two separate
2% of PPE
B/S non-
PLANT AND
businesses with duplications across their
reduction
current asset
EQUIPMENT (PPE)
PPE assets. This includes head office,
from FY15
deduction of
CONSOLIDATION
design, manufacture, maintenance and
onwards.
2%.
Following completion of the rationalization
10%
P/L expenses
of the PPE assets, ongoing overhead
reduction of
to reduce by
saving expenses will be realised due to the
UGLs
10% of
business consolidation process. For e.g.
overhead
UGLs
utilities, telecommunications and IT
costs.
overheads or
components and overhaul facilities. A

strategic review of the merged property
assets will be assessed and duplications
shall be rationalised.
7.
OVERHEADS
expenses will be reduced by an estimate of
$16m p/a
10% of UGLs overhead expenses.
from FY15
onwards.
8.
PROCUREMENT
DOW and UGL represent large customers
2% reduction
P/L expenses
COSTS
for raw materials and components,
of combined
to reduce by
contracting, leasing and other services.
procurement
2% of
costs.
combined
Post-acquisition of UGL will enable DOW
procurement
to realise lower procurement costs across

all segments due to contract renegotiations
and increased economies of scale by the
merged entity procurement.
costs.
IX.
Deal Structuring
A.
Strategic Takeover
Downer may consider a strategic takeover approach on UGL through creep or pre-bid methodology
where an initial acquisition of 20% could be considered followed by a scheme recommendation of the
directors at UGL. This is the preferred approach by acquirers as reported by Clatyon Utzs Real Deal
2014 report given the low risk appetite that DOW may have as well as UGLs recent rocky business as
discussed earlier in this report. The approach consists of taking out a minority stake and securing a seat
on the board and through this, access to information and influence over management of the company that
no due diligence process could replicate.
The pre-bid methodology is advantageous for various reasons
1. By taking out 20%, it can block competing bids from reaching the 90% compulsory acquisition
threshold
2. Reduces the number of shares for which acquirer has to bid
3. Can lower the acquirers average acquisition price
The strategic approach could consist of an initial engagement with one of the directors (or the chairman)
of UGL to discuss and understand their willingness to consider the transaction. In this case, Kathryn
Dianne Spargo (Non-executive Chairman) could be a potential target as she is a newly appointed and the
company has not performed well during her term since October 2014 (-23% Total Return)31
31
Total Return number taken from Bloomberg Professional Service
During Pre-bid period, DOW can begin integration of synergistic features, systems and applications for a
future consideration of full integration. Testing these systems can quantify $230m and $1bn premiums for
full management control and post synergy values. Failing the friendly pre-bid strategy into Scheme
Arrangement, DOW can consider hostile takeover by market bids which present certain risks in culture
and integration that is discussed later.
B.
Initial Strategy + Bid

1.
Pre-Bid Acquisition
Initial (Pre-Bid) Consideration (Management Control Value):

-
Up to $100million AUD or $3.04 per share = 20% of Stock + 20% premium (for stock + seat at the
board as premium)
Up to $30 funded by cash held by DOW

and
Up to $70 funded under arrangement with a potential financier (Australian or well-known

financier)
2.
Balance Acquisition
Full Consideration (offered 6 months down the track, after initial creep move):
-
Up to $680million AUD or $4.13 per share = Balance of Stock + 10% (premium determined by
pre-synergy valuation) + 60% (premium determined by post-synergy valuation)
The maximum premium will be 70% or $280million AUD

o
Up to $340million AUD cash held by or through funding arrangement by DOW
Up to $340million AUD Scrip Value held by DOW
Opening position would be approximately 50% of the consideration mentioned above
3.
Conditions of Bid
Minimum target shareholder approval of 75% shares voted (and 50% of shareholders who vote)
for scheme (Pass through and resolution)
No material adverse change condition
Receipt of necessary regulatory approvals (ACCC for Rail Industry Market Share)
No major fall in industry index during offer period (Protect against major changes in industry)
No change in UGL capital structure (No winding up or change in business/corporate structure)
Maximum of $40million AUD DOW Scrip Value 6 Months Escrow (Test initial acquisition
integration)
Maximum of $240million AUD DOW Scrip Value 12 Months Escrow (Test post acquisition
synergies and plans)
No Shop, No Talk for 6 months during negotiations (Exclusivity Period) Fall-back position will be
Terms and not price.

-
Extension of Exclusivity
Acceptable Merger Implementation Agreement (Key Terms as set out by Target as a result of
Scheme of Arrangement
Acceptable Change in Control (Check contracts, books and all agreements)
Conditional on Financing
Target Break Fee 1% (Protects DOW transaction fees and accepted in more than 80% of deals)
with material breach of implementation agreement
Directors (or Chairmans) recommendation is sought
C.
Board Transition Arrangement
A company is a group of systems, symbols, language, assumptions, and habits. For this reason its culture
is an essential part of an organization which includes understanding and evaluating individual company
cultures. Quality of Management plays a crucial part in facilitating this process hence as CEO's Mr. Ross
H. Taylor (UGL) has over 30 years of experience in the construction, engineering and real estate
industries in Australia and internationally while Mr. Grant Fenn (DOW) has been the Managing Director
and CEO of Downer since July 30, 2010. Mr. Fenn serves as the CFO of Downer Engineering Electrical
Pty. Ltd. He has over 20 years of experience in operational management, strategic development and
financial management. Mr. Taylor served as Managing Director of Tenix Pty Ltd and also served as its
Chief Executive Officer since April 2009. During his tenure at Tenix, he successfully implemented and
delivered a five year operational turnaround and strategic plan, generating strong profitable growth for the
business with a commitment to safe and sustainable business practices. In order to integrate in a better
way the merger with UGL Ltd, we believe that Downer should offer to Mr. Taylor a board position at DOW
to leverage his experience for a smooth transition post acquisition.
Downer and UGL work in the same industries and both have a strong Australian imprint in terms of
human resources but of course with different norms, systems, symbols, language, assumptions, and
habits. In our opinion they should analyze the strengths and weakness through employee interviews
customer feedback in order to build and shape a comprehensive culture which is a right fit.
D.
Implementation and Integration Planning
MOBILISE
Strategy selection
Start negotiating
Due dilligence
Signing
Completion
PLAN/DESIGN
Completion
IMPLEMENT
Closing
Day 1
30 days
45-60 days
100 days
Integration office (approach,

methodology, timelines)

Implementation
Recruity / Gap Fill
Retention/Promote
Culture Integration
Synergy Tracking
Execute
Retention/Promote
Training
Synergy Tracking
Execute internal & external

communication
Interim Organisation
Capabilities Audit
Design Incentive plan
Cultural diagnostic (The difference in

managerial capability and company culture in terms of
managing simpler large projects vs large technical
projects is expected to impact negatively on the
productivity of the post-acquisition DOW/UGL
company.)
Project controlling monitoring and

Reporting

Re-align Strategy
Assess HR Value (Employees /

Head count shall be reduced by 770
employees or 10% of UGLs
workforce post acquisition.)
Project controlling, monitoring

and reporting
Interim Organisation
Culture Integration
Execute internal & external

communication

X.
Appendices
A.
Appendix 1 Downer Business Portfolio Services
Pre-
Post
Restructure
Restructure
Outline of Business Services
Road services include surfacing and stabilisation,

maintenance and bituminous products and logistics.
Utility services include transmission and distribution network
Infrastructure
services, water infrastructure delivery and the provision of
Services
communications infrastructure management solutions.
Infrastructure Project services include maintenance,

procurement, installation, construction and commissioning of
rail infrastructure, civil earthwork and airfield works.
Electrical and Instrumentation services include system

design, installation and process instrumentation, testing,
automating/ticketing systems and road traffic signals.
erection, equipment, installation, scaffolding and rigging
Engineering,
Construction
Infrastructure
and
Structural, Mechanical and Piping services include
services.
Industrial and Infrastructure Maintenance services include

industrial plant maintenance, shutdowns, open space
Maintenance
management, and property maintenance.
Resources Based Consultancies consists of minerals

process engineering and project delivery (QCC Resources)
and the supply of mineral separation equipment, processing
plant and services (Mineral Technologies).
Infrastructure Services consists of public infrastructure

maintenance and operations; build and maintenance of
roads, rail, airports, ports and water infrastructure;
emergency and winter response; outsourced water
New Zealand
operations and maintenance; facilities management of public,

commercial utilities and buildings.
Technology Solutions includes communication network

installation; high speed broadband deployment; solutions
integrator for network owners; geographic information
systems design and data management; and design, construct

and maintenance services to electricity and gas distribution
networks.
Open Cut Mining service contractor for a wide range of

commodities. Capabilities include mine engineering,
scheduling and planning, load and haul operations, dozer
push operations, crusher feed and operation, facilities and
infrastructure design and operation, mine road construction,
Mining
mine site rehabilitation, statutory management of operations,
Mining
operations of coal handling and preparation plants.
Underground services to deliver all types of hard rock

underground operations from existing Brownfield projects to
remote Greenfield developments.
Services include blasting solutions and off road tyre

management and optimisation services.
Freight services include locomotive sales, maintenance and

component / after-market parts support.
Rail
Rail
Passenger services include design, source/manufacture of

passenger trains, maintenance services and component
overhaul / aftermarket parts support.
B.
Appendix 2 Downer Business Portfolio Analysis BCG Matrix Analysis
High
Question Mark /
Problem Child
MINING
Growth
Market
STAR
COW
DOG
RAIL
Low
INFRASTRU
CTURE
Market Share
High
1.
Low
The Infrastructure portfolio consists of the Infrastructure Services, Engineering,

Construction and Maintenance and New Zealand business divisions from Downers new
divisional structure.
2.
The size of each business portfolio (diameter) is mapped according to the business divisions
respective Profit as a % of Revenue.
3.
Market Growth is the forecast growth rates from 2015/2016 through to 2019/2020. The
forecast rates for each division is Infrastructure = 1.12%, Mining = 0.9% and Rail = 0.23%32.
4.
Market Share is the current estimate market share for each respective business division. The
estimate market share for Infrastructure = 6.10% (implied from Heavy Industry and Other
Non-Building Construction in Australia due to lack of secondary resources available), Mining
= 15.50% and Rail = 23.40%33.
32
2015,

33
2015,
C.
Appendix 3 Downers Purpose, Promise and Four Pillars

1.
Downers Purpose (Vision)34
We exist to create and sustain the modern environment by building trusted relationships with our public
and private sector customers.
2.
Downers Promise (Mission)35
To work closely with our customers to help them succeed, using world leading insights and solutions.
3.
34
and-Pillars.aspx,
35
2015, (accessed 1 May 2015).
and-Pillars.aspx,
36
Downers Four Pillars36
2015, (accessed 1 May 2015).
and-Pillars.aspx,
2015, (accessed 1 May 2015).
4.
Group Business Strategy37
Strategic Objectives
Prospects
Maintain Focus on Zero
Improve health and safety performance continuously to achieve its goal
Harm
of zero work related injuries and environmental incidents
Continue to Drive Business

Performance
Right size business in alignment with market conditions.

Pursue initiatives to strengthen the foundations of its business. These
include:
Enhance management capability to improve operational and

financial performance
Strengthen the Foundations

of Downers Business
Maintain industry and geographical diversification to achieve

greater resilience through economic cycles
Continue to improve tender, contract and project risk

management processes
Continue to improve balance sheet and capital management
To pursue growth in core markets with key customers through various

strategies which include:
Continuous improvement of the Companys engagement with

customers, including working with them constructively to
reduce costs and improve productivity
Drive Growth in Core
Leverage Cross Selling opportunities
Developing and growing Asset Management capabilities
Focus more closely on forward revenue opportunities, including

the outsourcing of road maintenance by State Governments,
Markets with Key Customers
large LNG projects and the NBN roll-out.
Expand into overseas markets selectively through existing

customer relationships
Continue to grow Downers Rail locomotive and Passenger

train maintenance businesses to replace revenue streams from
manufacturing contracts
Continue to achieve production and cost efficiencies in the

mining services business
37
Downer EDI Limited, 2014 Annual Report, Pg.12-13, http://www.downergroup.com/Resources/Documents/Investors/Financial-
Results--Reports/201314/Full-Year-Results/20140805-Annual-Report-2014.pdf, 2014, (accessed 30 April 2015)
Alternative growth opportunities through M&A:

Assess Alternative Growth
Options
Bolt-on acquisition
Broadening of capabilities
Transformational merger
Geographical expansion
Simplify, Consolidate and
Fit 4 Business program to further consolidate and leverage its existing
enable the Downer Business
business more broadly and capitalise on growth opportunities.
D.
Appendix 4
Individual Assignments
RCR Tomlinson Sahil
Target:
RCR Tomlinson (ASX Code: RCR AU)
Acquirer: Downer EDI
(ASX Code DOW AU)
Introduction
I propose Downer EDI to acquire RCR Tomlinson. Downer is a leading provider of
services
to
customers
in
transportation,
infrastructure,
mining,
resources,
telecommunication and utilities. RCR Tomlinson is a diversified engineering and

Infrastructure Company competes with Downer offering integrated engineering solutions
to clients in resources, mining and infrastructure industries. Both companies derive
majority revenue from ANZ.
Strengths (Strategic Acquisition)

Downer can make a strategic acquisition to create economies of scale, diversify its revenue streams as a
part of its overall business strategy to rebrand and become a leading contractor within infrastructure
services. Group can leverage on RCR's core competencies to streamline its operations and bring in RCR's
technical expertise into use. Integration of core capibilities will help group reduce costs for its big future
projects in the pipeline (mainly NSW and VIC Infrastructure transport projects as well as QLD Adani
Carmichael project). The recent announcement that the Victorian Government is intending to build an
$11.5bn rail tunnel could have long term potential for RCR to be involved in. RCR's strong order book, core
capabilities like design & construction of power stations, structural, mechanical, piping and electrical
construction and maintenance for the resource sector which can be leveraged in big projects. RCR's
strengths also lies in high voltage power systems, communications and overhead wiring systems for the
infrastructure sector. . The importance of RCRs management cannot be overlooked, track record of Paul
Dalgleish (CEO) and his team has been very good and he is a manager worth backing.
Downer should include Paul in the new board post acquisition. RCR has a broad capability in Infrastructure
and has the technical expertise that could see it involved in larger infrastructure projects. Downer CEO
Fenn recently quoted in Sydney Morning Herald "The proportion of profits Downer derives from contract
mining is declining, we plan to be a multi-modal public transport operator. Mr Fenn is keen to expand the
company's infrastructure and transportation businesses, with the group's Keolis Downer joint venture
paying $163 million for privately-held bus operator Australian Transit Enterprises (ATE) in March 2015.
RCR had significant increase in infrastructure exposure particularly post the acquisition of Norfolk in late
July 2013, which has reduced its reliance on mining services.
Attractive Valuation of RCR

RCR is valued at an attractive price to its peers since its share price has declined almost 26% since March
2015 on the back of fall in iron ore pricing. (ASX, 2015). RCR seems to have a strong balance sheet with
gearing as less as 6%, debt of $18m with cash in hand around $73m (Company reports, Downer 2015).
RCR is a smaller market cap, low Capex Company that is trading in line with its Net tangible assets, also
shows that the stock is cheap,
Weaknesses
In the first half of 2015 RCR generated 28% of its revenue from its Resources division (Company Reports,
RCR 2015) mostly leveraged to the mining industry included maintenance work, there remains a risk that
revenue in this division could materially fall. A lower revenue base means that fixed costs begin to impact
margins. RCR has not performed large volumes of work for companies like BHP and RIO, who are more
likely to spend through the down cycle in iron ore as compared to other small companies in the same
industry.
For RCR potentially revenue is forecast to decline (mostly in the Resources division). This is a result of low
contract wins announced and the general reduction in available
work. Majority of contractors in this space are potentially facing working capital outflows and RCR
is not an exception. If Downer acquires RCR, group could be exposed to big chunk of exposure
towards mining and resources since RCR and Downer both still have some exposure. Volatile
prices for iron ore and coal are resulting in lower demand and an uncertain environment for
contract mining services, construction work and rolling stock maintenance work could take a big
hit on overall revenues in the end if proper risk management measures are not undertaken.
Opportunities
Growth in Infrastructure spending could be seen as more of a medium to long term driver. There is an
opportunity in NSW for a large increase in infrastructure spending and outsourcing of council controlled
maintenance works post the re-election of the state Liberal party in March 2015 which could be a big
opportunity from the acquisitions perspective. Amount of outsourcing that is likely to occur in NSW and QLD
in power infrastructure, driven by a regulatory decision Infrastructure spending does appear to be increasing
and RCR is one of only a few major players in the Australian market with a large electrical capacity. There
are additional governments outsourcing opportunities which includes a move away from in-house
maintenance work in transport, water and power infrastructure which downer can leverage of RCRs strong
order book. Post-acquisition there is an opportunity for Downer to identify any leftover synergies from
Norfolk Acquisition which RCR made in 2013.
As Downer is one of the largest Australian contractors its infrastructure division has developed solid
relationships with large mining and energy companies, which provides a level of protection and contract
renewal. Acquiring RCR will position Downer as a specialized service company in this sector and take them
close to compete with Leighton which has maximum market share. RCR also has contracted long-term
recurring maintenance and management services for government and large corporations which will provide
a
further
level
of
stability.
Threats
The sector has structural challenges and businesses are facing tough market conditions. Industry is in a
consolidation phase but dealing with clients who are involved in cyclical businesses, capability and
reputation are critical elements in awarding contracts. The major short-term threat is a slowing Chinese
economy which will have impact on volume demand for domestic iron ore and coal. . Domestic cost
pressures and falling commodity prices are raising concerns regarding production expenditure, with
increasing pressure being positioned on contractors to lower profit margins when bidding for new work and
extensions. Downer and RCR both face headwinds, including mining project delays and increased
customer bargaining power in mining service contract negotiations. On the other hand the change of state
governments in Queensland and Victoria will delay the amount of infrastructure spending in those states
(compared
to
previous
government
promises)
could
threaten
the
revenue
stream.
Undoubtedly, demand is slowing and competition is increasing, particularly as

Projects are delayed, and the major mining companies are looking to lower operating costs and capital
expenditure. In this environment Downer's acquisition of RCR establish long-term relationships with key
customers mean it is well-placed to compete, although a continued trend to an owner-operated model by
the miners could be a threat.
SWOT Analysis of UGL Ltd Francesco
Strengths
Strength - Strong Order Book

The order book consisted of more than 5,500 individual contracts on commercially balanced trading terms in 2014.
Engineerings order book stood at AUD 4.9 billion for the year. Commencing the new financial year, the Engineering
order book is already 70% sold. The quality of the order book continued to remain one of the core strengths of UGL
reflecting the diversity of UGLs revenue streams and core capabilities in the current growth sectors of transport
infrastructure and LNG maintenance.
Strength - Leading Market Position in Railway Equipment Manufacturing and

Repair in Australia.
The companys UGL Rail is the leading provider of passenger and freight rolling stock, rail infrastructure and asset
management services in Australia. UGL has an estimated Market Share of 37.90 % in the Railway Equipment
Manufacturing and Repair in Australia38. UGL has active passenger rolling stock maintenance contracts in New South
Wales39 and Victoria. The company's industry segment revenue is expected to decline at an annualised 2.4% over the
five years . The company is underperforming the overall industry in nominal terms. The underperformance is attributed
to delays in major projects, the closing of poor-performing projects and delays in tenders or bidding for major project
prospects. Cost reductions by major resource clients have reduced demand for the company's services and affected
revenue. The future looks brighter for the rail segment, with construction of the North West Rail Link in Sydney
beginning in 2014-15.
Weaknesses
Weakness - High Debt
UGL continued to report high leveraged capital structure in 2014, which may affect its expansion and growth plans.
For the fiscal year ended June 30, 2014, the company reported total debt of AUD 745.2 m, as compared to AUD779.4
m in 2013. It debt to equity ratio stood at 64%, as compared to 53% in 2012 and 70 % in 2013. For this reason on
November 2014 UGL completed the sale of DTZ for a total consideration of $1.215b to a consortium comprising TPG
Capital, PAG Asia Capital and Ontario Teacher's Pension Plan. The CEO of UGL Richard Leupen said that the sale
of DTZ would enable UGL to refocus on the engineering services business, with a clear strategy unambiguously
centred on a single industry. Now according to Him, UGL has about $500 million in net cash."40
38
The company has expanded rapidly through acquisitions, including of Goninan in 1999 and the rail operations of
Alstom Australia New Zealand in 2005. The company is heavily involved in the freight rail and mining segments,
producing for contracts that Goninan originally entered into.
39
Over the five years through 2014-15, the company has also manufactured rolling stock for New South Wales' RailCorp. The
company has completed stages one, two and three of the Outer Suburban Railcar project. This has updated the rolling stock on
outer suburban NSW rail lines. The NSW Government has named UGL as the preferred operator for the $8.3 billion North West
Rail Link.
40
Highly levered balance sheet could impair its ability to obtain financing for working capital, capex or general corporate
purposes, especially if the ratings assigned to its debt securities by rating organizations were revised downward. It could restrict
As we can see ,nowdays, Australia is suffering with the fall in the price of natural resources such as Coal (the price is
$US56.60 a tonne, down more than 60 per cent since prices peaked in 2011), Iron ore (which falls to lowest since May
2009 on weak China demand. The price of iron ore has fallen by around 30% this year, amid forecasts it will continue
to drop.)
Weakness - Operational Performance

UGL reported decline in its operational performance in 2014. For the fiscal year ended June 30, 2014, the company
reported revenue of AUD 1,819 m, reflecting a decrease of 4.41% over that in 2013. The decline was primarily
driven by decrease in revenue from its engineering, and operations & maintenance business due to
underperformance across several power projects comprising project approval delays and cancellations and the cost
management focus of the major miners, but UGL in 2015 closed two important contracts both in the LNG sector.
The first has seen UGL Ltd awarded a new four year contract with ConocoPhillips on behalf of Australia Pacific
LNG (APLNG)41.
Regarding the second contract UGL has been awarded a new three year contract by $120 million contract by Santos
GLNG42.The companys operating costs as a percentage of its total revenue increased in 2014, causing decline in
operating income. Consequently, UGLs operating margin contracted. Decline in operational performance adversely
affected the overall profitability of the company.
Opportunities
Opportunity - Engineering Business Expansion: Asia
the flexibility of the company in responding to changing market conditions and make it more vulnerable during times of
slowdown. Another major consequence of the debt is that the company would need to allocate a substantial portion of the cash
flow from operations to pay the principal and interest on debt, thereby reducing funds, which could be used for expansion
through acquisitions, expansion of product offerings and for marketing.
41
Here UGL will provide downstream maintenance, shutdown and modification project services for the operational phase of the
Curtis Island LNG facility. The company expects the contract to generate multi-million dollar revenue over the initial term.
APLNG is a joint venture between ConocoPhillips, Origin and Sinopec and is the largest producer of gas from coal bed methane
(CBM) in Australia. The LNG facility on Curtis Island, Gladstone, is expected to start exporting LNG in mid-2015. UGL is
expected to commence mobilisation of its workforce in the first quarter of the 2015 calendar year.
42
Under the scope of the contract UGL will perform maintenance, shutdown, engineering and project services for Santos
GLNGs LNG facility.
UGL focuses on expanding its engineering business in Asian markets. The company has secured and successfully
delivered projects in various parts of Asia and we have an ongoing business in Singapore and Malaysia in the water
sector, and Hong Kong in rail. In India, the company established an office43. The company focuses on expanding its
presence in South East Asia, based on its existing water capabilities in Singapore and Malaysia. The South East Asia
business will target growth across the ten ASEAN nations in key sectors including oil and gas, rail and water and other
areas where UGL has specialist skills and knowledge. Business expansion in Asian growth markets could provide
ample growth opportunities to the company.
Opportunity - New Business Contracts

As a part of its organic growth strategy, the company secured several new business contracts. As mentioned above,
in 2015 UGL has closed two contracts both in the LNG sector, respectively with ConocoPhillips on behalf of
Australia Pacific LNG (APLNG) and Santos GLNG. In addition, in April 2014 the company secured a new
AUD136m contract by Alinta Energy to design, procure and construct the Newman to Roy Hill High Voltage Power
System, stage one of Alintas East Pilbara Link Project44. In December 2013, the company received a five-year
contract by Chevron Australia Pty Ltd for the provision of maintenance services for the operational phase of
Chevrons Western Australian assets45.
Threats
Threat - Changing Environmental Regulations
The changing environment and waste management regulations can have a major impact on the companys business
43
The companys joint venture Texmaco Joint Venture commenced operations and UGLs facility in Kolkata has started
producing and exporting high precision steel fabricated components for the rail sector.
44
The scope of the project include concept development, design, construction, testing and commissioning of 120km of 220kV
single circuit transmission line between the Newman Power Station and RHIO Mine; a 66/220kV substation and associated 66kV
connecting works at Newman; a 220/33kV substation at RHIO Mine; a 6MW reciprocating diesel engine Power Station at RHIO
Mine and a 33kV electrical distribution system at RHIO Mine. In February 2014, UGL Kentz joint venture received a contract by
JKC Australia LNG Pty Ltd for the structural, mechanical and piping (SMP) construction package for the Ichthys LNG Project in
Darwin.
45
UGL may offer mechanical, electrical and instrumentation base maintenance, plant turnaround and Brownfield execution
services for Chevrons Western Australia assets. Such new contracts ensure future revenues for the company.
operations. The companys operations are subject to Environment Protection and Biodiversity Conservation Act and
Waste Management and Pollution Control Act in Australia; Waste Minimization Act and Resource Management Act
in New Zealand46.
Threat - Contract Bidding

UGL carries out government projects that are secured through competitive bidding process. The company receives a
large portion of order book from state and federal governments covering water, transportation, power and utility
departments. The current uncertainty in the global economy and stringent regulations may reduce the number of
projects and in turn force the companies to bid for projects at a lower price. This could have an adverse impact on the
performance of the company.
Threat Competition
It competes with other industrial players based on contracts, service capability, price, human resources and delivery
time. Its companies include players with substantially greater financial, marketing and distribution resources. Its major
competitors include Transfield Services Limited; Downer EDI Limited and Leighton Holdings Limited. With the entry
of more new players in this construction and allied services market, competition is expected to intensify in the near
future, which may lead to price discounts. To sustain itself in the market the company needs to aggressively market
its services with superior quality, safety and environmental care. Such highly competitive market could adversely
impact the companys operational and financial performance.
46
Some of these laws and regulations may impose strict, joint and several liabilities on companys operations for the cost of
investigation or remediation of contaminated properties. The company could face challenges in the event of non-compliance with
these regulations. Changes in environmental and other laws and regulations in both domestic and foreign jurisdictions can adversely
affect operations due to increased costs of compliance and potential liability for non-compliance.
SWOT Analysis of AusNet Leyon
XI. Downer Ltd.

Downer EDI is a listed company in the ASX providing engineering, infrastructure and construction
management services. Main operations are in Asia Pacific but have minor projects in Africa, South America
and Asia.
In 2014, 61% of the revenue was derived from Infrastructure and mining contributed to 26% i. Economic
slowdown in Chinaii, falling Iron Ore pricesiii,The slow down of and the cancellations and delays in the
Australian oil and gas projectsiv has raised red flags for Downer EDIs going concern.
Target Acquisition
This analysis will look at how Downer EDI can diversify into a new market with more stability in the next 5
years. The target company is the Melbourne based AusNet which has downstream operations such as
distribution and transmission of electricity and gas in Victoria. They achieved revenue of AUD1.8m v (25% of
Downers FY14 revenue) in 2014.
SWOT
Strengths
The ownership of electricity transmission network in Victoria and being the lead supplier in electricity
distribution networks and gas distribution will enable Downer to expand their capabilities in in the downstream
electricity and gas markets. Adding capabilities to the existing portfolio will reduce risk Downer is currently
facing in the business segments that exposed to the minerals and mining sector slow down. The significance
of the downstream market expansion is that its linked to the growth of the households in Victoria.
These capabilities will compliment the revenue stream of Downers recent acquisition of Tenix, which performs
maintenance work for the gas and electricity distribution network for AusNet. Through better cost and price
control, Downer can thereby pass the benefits to the consumer via competitive electricity and gas prices.
Further more, current maintenance contracts for Tenix could be secured for the longer term.
AusNet has had a consistently growing revenue stream with healthy profits. 2009 2014 the average revenue
growth was 9%. In 2014 Net profit margin was 10% while Downer was only able to achieve 3% vi. With the
growth in the households in Victoria (to increase by 10% over the next 5 years vii) this is likely to yield constant
high returns in the future.
Safety Mission Zero strategy Both companies has a strong emphasis on reducing injuries. Therefore
knowledge transfer in this area could be developed as best practices to achieve the common goal.
Performance driven employee culture- At AusNet, 40% have taken part in a salary sacrifice employee share
option scheme. This will draw the attention of the employees to be productive, innovative and to act in the best
interest of the company. Furthermore High employee engagement percentage v at AusNet proves that the
company will benefit from productivity and low employee turnover.
Weaknesses
Return on assets (1.7 times) is half of the industry average (3 times). This signifies that asset base is not
productive enough, hence as mentioned in the future revenue plan
viii
AusNet will need to invest in productivity
improvement initiatives. If acquired, this will be an investment required from Downer.
Working Capital constitutes a significant portion of short-term debt which is not supported by the adequate non
current assets. This increases the short-term financial risks in meeting the working capital requirements.
Hence this will need to be considered in the acquisition decision by downer.
Electricity Distribution is not a core-capability of Downer. Therefore they will not be able to transfer much
competencies to better the practices followed in this industry. This factor would limit the potential synergies
that could be developed.
Opportunities
The capabilities acquired from AusNet can be used by Downer to capitalise prospective opportunities when
Australian states adopt the option to privatize energy companies which are currently state owned, such as in
Queensland. Hence, AusNet can be used as a sand pit to evaluate the success of the strategic fit.
As Western mining boom slows down Downer can now evaluate the option of scaling down the operations and
selling redundant and non-productive assets. Which can then be used to fund the investment needed in the
new acquisition.
Threats
Emerging technologies and alternative energy sources such as solar are been used by industries and
households and the contraction of manufacturing sector could contribute to soften the increase. Moreover with
growing R&D in the alternative energy sources sector, AusNet and similar companies could face slow down in
the growth. The downward shift in downstream companies could eventually result in potential asset writedowns in future.
Electricity distribution is quite regulated by the Australian Energy Regulator (AER). Hence, revenue is subject
to regulations resulting from capital expenditure allowances that are provided by AER based on their
expectations of the size of augmentation or expansion need to for the industry. This would restrict some of the
growth plans.
Different policies adopted by Liberal and Labour parties can discourage expansion of the non-governmental
energy transmission and distribution network companies. This change was quite evident in Queensland and
NSW where both parties had very opposing viewpoints to privatisation. While Privatisation will open
opportunities for Downer to expand, it will also invite competitors to capture market share.
XII. Summary
In summary this move will provide an option for Downer to mitigate the crisis in mining and related
infrastructure, establish a stable revenue portfolio with high margins. On the negative side, this industry and
risks attached to it is new to Downer, hence there would be delay up untill synergies are strategically
developed.
SWOT Analysis of NorthPower Limited Tom Chan
XIII. SWOT ANALYSIS NORTHPOWER LIMITED

The M&A target is Northpower. Northpower is an owner and operator of electricity distribution networks
and has diversified its business to become New Zealands (NZ) largest service provider to the electrical
distribution sector; and one of the largest multi-utility contractors in NZ47.
47
Northpower Limited, Company Profile, http://northpower.com/contracting/companyprofile, 2015,
(accessed 28 April 2015).
STRENGTHS
WEAKNESSES
Strategic Capability
Geographic Diversity
Brand Equity
Financials
Commitment to Safety and
Environment
Ownership Structure
Company Size
Narrow Market
Company Culture
OPPORTUNITIES
THREATS
Alignment of Capability
Market and Capability Development
Australian Business Integration
Benefit
International Market Expansion
NZ UFB Network
NZ SCIRT Rebuilt
NZ Transmission Network
Post-acquisition Financials
Safety and Environmental Value
Congruence
NZ Infrastructure Investment
Competition
NZ Demographic / Geographic
Constraints
NZ Construction Sector
NZ Monetary Policy
Foreign Exchange Risk
Figure 2: SWOT Matrix Northpower Limited Target Acquisition
A.
Strengths
1.
Strategic Capability
Northpower is an electricity network owner and operator of the Whangarei and Kaipara electricity
distribution network and a 5MW hydro-electric power plant48.
Northpower provides design, construction and maintenance services for transmission towers, substations,
renewable energy stations and distribution networks in the energy sector.
48
2.
Northpower provides design, construction and maintenance services for advanced
telecommunication networks, plant and equipment.

Northpower provides design, installation, operation, maintenance and asset management services for
integrated power and electrical supply to the industrial/commercial market.
3.
Geographic Diversity
Additional to the NZ Network and Contracting division, Northpower owns an Australian business in the
Power market. West Coast Energy (WCE) holds long term service contracts with Australian electricity
networks in WA and VIC.
4.
Brand Equity
Northpower has gained strong brand recognition as a successful Ultrafast Broadband (UFB) contractor
that has delivered ahead of schedule in Whangerai. Northpower Fibre has experienced the highest
uptake of any UFB Wholesaler in NZ49.
Northpower has a positive brand equity as a trusted electricity network service provider amongst its NZ
customers on the Northland.
Financials
From 2010 to 2014, Northpower delivered 50% revenue growth and 40% EBITDA growth with consistent
dividend returns to shareholders. Northpower carries low gearing on its balance sheet at 22% in FY2013
and 21% in FY201450.
5.
Commitment to Safety / Environment
Northpower has a strong commitment to safety and the environment. Northpower has signed a
Government initiative, Zero Harm Workplaces Pledge and has gained accreditation for its environmental
management system, ISO 1400151.
B.
Weaknesses
Ownership Structure
Northpower is owned by a Co-op Trust (NEPT). NEPT is held on behalf of Northpowers electricity
network customers as the Trusts beneficiaries. The Co-op Trust structure may pose as an issue to
access the share registry.
49
Northpower, Annual Report 2013-2014, Pg.6,
http://northpower.com/images/uploads/documents/disclosures/annualReports/NP-AnnualReport-20132014.pdf, 2015, (accessed 28 April 2015).

50

51
Company Size
Northpower primarily services a niche market segment (Power and Telecommunications) with 1,000
employees and $308m (FY2014) in revenue52. Relative to Downer, Northpower is small and their unique
market position may be jeopardised if integrated with a large and diverse organisation.
Narrow Market
Northpower primarily specialises in the Power and Telecommunications market in the Northern region of
NZ. Downer may struggle to leverage Northpowers capability to enter into alternative market sectors
(Transportation, Mining and Rail) and the competitive contracting market on NZs South Island.
Company Culture
Downer ASX listed; large corporate; diverse engineering and construction company; highly acquisitive.
Northpower Trust coop structure; regional market; Power and Telecommunications services;
Government spin off from NZ market deregulation.
C.
Opportunities
1.
Capability Alignment
2.
Northpowers transmission, telecommunications; and industrial and commercial
capability is strategically aligned to Downers Infrastructure division (Power, Telecommunications

and E&I).
3.
Market and Capability Development
As an electricity network owner, Northpowers IP will add knowledge value to Downer as a service
contractor. Knowledge transfer can be leveraged to provide value to Downers Australian Infrastructure
(Power) division.
Northpower Fibre is a wholesale UFB service provider in NZ and is joint owned between Northpower and
CFH. Northpower provides a vehicle for Downer to diversify and enter NZs telecommunications service
provider market with minimal investment.
Australian Business
Downer can potentially realise revenue and cost synergies in the Australian Power Infrastructure sector
by integrating WCE and DownerTenixs customers and office operations.
4.
International Expansion
Downer Infrastructure New Zealands revenue is $554.7m (30% of Downers Infrastructure). Northpowers
New Zealand Network and Contracting revenue equates to $245m or 80% of group revenue 53.
52

53
Northpower Limited, Annual Report 2013-2014, Pg.8,
http://northpower.com/images/uploads/documents/disclosures/annualReports/NP-AnnualReport-2013-
Northpowers acquisition mitigates economic risks by diversifying revenue across two economies.
NZ UFB Network
Northpower is one of four partners contracted to deploy the UFB network to Crown Fibre Holdings (CFH).
Northpower enables Downer to vertically integrate upstream as a direct CFH UFB contractor.
5.
NZ SCIRT Rebuild
Downer is a core participant of the Christchurch earthquake rebuild team (SCIRT), Northpower can
increase Downers local service capability (Power and Telecommunications) and potentially expand
SCIRT business54.
NZ Transmission Network
6.
NZs transmission infrastructure, construction and maintenance is completely outsourced
by Transpower. Northpower acquisition offers immediate and low cost market entry55.
7.
Northpowers acquisition enables entry into NZ with secure, long term contracts to major
electricity providers56.
Post-Acquisition Financials
Due to Northpowers size, balance sheet strength and financial performance; Downer will be able to retain
a low gearing ratio (post-acquisition). This is aligned to Downers M&A objectives.
Safety / Environmental Value Congruence
Shared values to Northpower as Downer also prioritises safety and the environment through a Zero Harm
initiative, the implementation of Downers Board Zero Harm Committee and Downers annual
Sustainability Reports57.
NZ Infrastructure Investment
New infrastructure projects in Auckland are worth $24bn and earthquake reconstruction projects are
expected to reach $40bn in Christchurch58.
2014.pdf, 2015, (accessed 28 April 2015).

54
New Zealand Trade and Enterprise, Invest, https://www.nzte.govt.nz/en/invest/sectors-of-
opportunity/infrastructure/, 2015, (accessed 30 April 2015).

55
Downer Group, Downer Group Investor Day Challenges and Opportunities, Pg.26,
http://www.downergroup.com/Resources/Documents/Investors/Investor-Presentations/2014/20140506Downer-Investor-Day.pdf, 2014, (accessed 29 April 2015).

56
Northpower Limited, Annual Report 2013-2014, Pg.6,

57
Downer Group, About Zero Harm, http://www.downergroup.com/About-us/Zero-Harm/, 2015,

58
New Zealand Trade and Enterprise, Invest, https://www.nzte.govt.nz/en/invest/sectors-of-
Forecasted long term growth in NZ infrastructure market. NZ Government has committed to a 20 year
National Infrastructure Plan (NIP) resulting in an increase in network and utility asset investment59.
D.
Threats
Competition
NZs UFB network fierce competition from Leightons and Transfield who have secured large contracts
through CFH partners.
NZs contracting mature market, large multinational competition, competitive prices, and tight margins.
NZ Demographic Constraints
NZs small population and poor geographical location caps demand for infrastructure investment 60.
Negative impact to Downers and Northpowers Infrastructure market segments.
NZ Construction Sector
The NZ infrastructure market is expected to moderate in 2015. Real growth in the construction sector is
expected to reach 7.8% in 2015 compared to growth projections of 13.8% in 2014 61.
Gross CAPEX contracted by 9% in 2014 and non-residential building investment slowed from 8% (y-o-y
Q1 2014) to 6.7% (y-o-y Q2 2014).
NZ Monetary Policy
Between March and July 2014, NZs official cash rate increased from 2.50% to 3.50%. Tightened
monetary policy could deter investment in new projects due to increased cost of capital.
Foreign Exchange Risk
From October 2014 to April 2015, the Australian dollar has depreciated by approximately 10% 62 . The
weaker Australian Dollar results in higher cross border acquisition costs and risk of further foreign exchange
volatility.
opportunity/infrastructure/, 2015, (accessed 30 April 2015).

59
The Treasury National Infrastructure Unit, Infrastructure Portfolio Overview,
http://www.infrastructure.govt.nz/aboutniu/portfolio, 2015, (accessed 30 April 2015).

60
BMI Research, SWOT Infrastructure Q2 2015, https://bmo-bmiresearch-
com.simsrad.net.ocs.mq.edu.au/home, 2015, (accessed 30 April 2015).

61 BMI Research, Industry Trend Analysis Positivity Lingers Despite Construction Moderation,
https://bmo-bmiresearch-com.simsrad.net.ocs.mq.edu.au/home, 2014, (accessed 30 April 2015).
62
XE, XE Currency Converter, http://www.xe.com/currencycharts/?from=AUD&to=NZD&view=1Y, 2015,
SWOT Analysis of Asciano Harsha
Introduction
Growth is important for creating value in todays competitive world. Mergers and Acquisitions are lever for
companies focusing on growth.
Success for mergers and acquisitions (M&A) is dependent on strategy, capability and execution. Downer EDI has
extensive experience in M&A since its start in 1863. Growth of Downer is predominantly driven by M&A and its
latest acquisition was Tenix in 2014. Assessing alternative growth opportunities through M&A is one of Downer
EDIs strategic objectives.
Asciano is key customer of Downer EDI. They won a $1billion contract recently to provide maintenance services to
trains over 10 years and this is a sign that Downer EDI is diversifying away from manufacturing to maintenance
services. This also can be further extended to a forward integration by acquiring Pacific National Rail a division of
Asciano which will provide greater access to revenue synergies. (Wong J 2015)
Downer EDI Limited

The Company operates via 3 divisions. They are Downer Infrastructure, Downer Mining and Downer Rail. Downers
Rails revenue has decreased by 7.2% in 2014 (excluding Waratah Train Project). This was driven by lower revenue
from freight build projects and decrease in demand for freight maintenance services.
Table 1: Financial Summary of Downer EDI for 2014
2014
Downer
Downer Mining
Downer Rail
Infrastructure
EBIT
49.7%
44.6%
5.7%
Revenue %
61.4%
25.7%
13.0%
Revenue A$ millions
4,685
1,924
755
Note: The above table is
generated using the information provided in the Downer group annual
report (Downer 2014).
Target Acquisition - Asciano Limited / Pacific National Rail

Asciano is a public company that manages and owns port assets and rail assets. It has 4 main divisions: Terminal
and Logistics, Bulk & Auto, Pacific National Coal and Pacific National Rail.
Pacific National Rail division is one of the leading providers of rail freight services in Australia. Pacific National
Rail division accounts for 35% (A$1,329mm) of Asciano revenue A$3,995mm. (Asciano 2014).
Table 2: Financial summary of Asciano Limited
2014
EBIT
Pacific
Pacific
National Rail
National Coal
43%
27%
Bulk & Auto
Terminals &
Logistics
11%
19%
Revenue %
Revenue A$ millions
35%
25%
21%
20%
1,329
1,160
793
749
Note: The above table is generated using the information provided in the Asciano 4E Full Year
Report to 30 June 2014 (Asciano
2014).
Table 3: SWOT Analysis for Pacific National Rail Division Acquisition

Strengths
Weaknesses
One of the leading owners of rail assets in

Australia
Exposure to volumes from coal, minerals and

grain
Expertise on bulk rail logistics
Few key customers and decline in customer

revenue driven by global economic conditions
Long term relationships with customers in long

haul intermodal markets in Australia
Long experience in freight services across
Australia and also connect all the main ports around
Australia
Strong industry structure with high barriers to
entry
Opportunities
Threats
Strong Customer base with averaging 5 to 10 year

long contracts
Lower emission energy such as green energy could

reduce the demand for thermal coal in future
Substitute services in this industry are limited
Impact on Australian coal products from emerging

markets, including India and China
Rail freight transport industry in Australia is

expected to grow at an annual rate of 4.4% from 2015
to 2020
Lower road freight service price
Strengths
National Pacific Rail is a leading owner of rail way assets in Australia and Downer EDI can capitalise on this
strength to enter in to this strong industry after assessing revenue growth opportunities
Managing rail assets and freight services is a new market for Downer EDI and therefore it requires expertise.
National Pacific Rail has the expertise which can be used and managed as a separate business unit under Downer
Rail division.
Opportunities
National Pacific Rail has a strong customer base which ensures revenue for the next 5 to 10 years and therefore
Downer EDI is able to look in to acquire these free cash flows
Since substitute for rail freight transport industry is limited, it provides a great opportunity for Downer EDI to grow
this business steadily with a strong customer base
Rail freight transport industry in Australia is expected to grow at an annual rate of 4.4% from 2015 to 2020 and
Downer EDI can leverage this to grow its revenue.
Weakness
National Pacific Rail has strong relationships with few customers: Rio Tinto, Whitehaven, Idemitsu, Graincorp,
Manildra, Cargill, Emerald, Boral, Glencore and Holcim. Therefore loss of these key customers will have significant
impact on the business. Global economic conditions will have flow on impact National Pacific Rail division.
Therefore Downer EDI needs to plan carefully consider how this can be minimised.
Threats
Volume is important as it drives the revenue. Lower emission energy such as green energy could reduce the demand
for thermal coal in future and therefore potential threat for bulk haulage services.
Emerging markets such as China and India will impact Australian coal exports. This will have a flow on impact on
Pacific National freight services across Australia.
Road transport has increased the competition in rail freight transport industry and also it has gradually reduced the
proportion of interstate freight transport by rail.
Downer EDI can successfully face the above threats as it can use the maintenance services efficiently to provide
more cost effective freight services and offer better prices against competitors
Applying the VIRO Test

What capabilities exist and can they be combined and leveraged?
Will this create a competence that satisfies the VRIO Test?
Will the resultant resource configuration confer sustainable competitive advantage?
Will the sustainable competitive advantage create value after taking account of further investment needs
and adjusted cost of capital?
Downer Rail capabilities include the freight rolling stock, provision, maintenance and overhaul of passenger,
development of innovative solutions for passenger cars, locomotives, light rail and freight wagons.
Downer Rail is able to use the maintenance services to rail assets that are owned by Pacific National Rail division.
This helps Pacific National Rail division to achieve cost synergies for its maintenance work and therefore able to
offer better price for the rail freight market and remained competitive and grow revenue.
In addition to cost synergies, Downer Rail is able to achieve revenue synergies through acquisition of National
Pacific Rail division as it enters to a new market with a strong customer base that will provide long term steady
revenue as a result of their long term contacts with Pacific National Rail division.
Downer Rails revenue accounts for 13% of the total revenue which approximates to $755 million. Pacific National
Rail is a division of Asciano and accounts for $1,329mm in revenue. (Downer 2014, Asciano 2014).
Downer Rail is currently providing maintenance, design, build and fit out services for passenger rolling stock and
freight rolling stock including locomotives and rail wagons.
Conclusion
Downer Rail can carry out a forward integration to acquire Pacific National Rail division which will provide access
to revenue and cost synergies as explained above and remained competitive in Rail freight transport industry.
SWOT Analysis of Service Stream Qiao
XIV. Background
Downer EDI Limited (DOW) is an ASX listed company that has grown both naturally and artificially
through acquisition. The purpose of this report looks at Service Stream Limited (SSM) through a
strategic framework (SWOT) in conjunction with a high level financial analysis of the company in
comparison to DOW that provides both qualitative and quantitative reasons for a potential acquisition.
SSM has recently gone through a capital raising whereby 28% of its shares now belongs to Thorney
International Pty Ltd and Thorney Opportunities Ltd where it is believed that a more favorable mediumlong term vision can be seen by its new majority investor.
XV. Operations and Revenue

SSM is divided into 3 main businesses: Fixed Communications; Mobile Communications; and Energy and
Water where the sectors achieved EBITDA of $2.4, $7.7 and $11.2 million for FY14 respectively.
EBITDA FY14
Fixed Communications
A.
Mobile Communications
Energy and Water
Fixed Communications
Design, Construction, Maintenance and customer connection services to the owners of

telecommunications network infrastructure and to telecommunications retail service providers in
connection with the roll-out of the National Broadband Network in Australia. These contracts relied mainly
on the Syntheo Joint Venture (Syntheo) due to the cessation of the Fujitsu New Estates contract and
various miscellaneous works. Smaller contracts were performed under New Developments, Field Service
Delivery and Network Augmentation & Restoration Activities with NBN Co and under Telstra pipe and
pipe remediation program.
B.
Mobile Communications
Program management and turnkey services for infrastructure projects across Australia within the
telecommunication sector. Service capability covers site acquisition, town planning, design, and
management of construction projects requiring specialist skill sets in wireless and fixed line
telecommunications, signaling and power. The main customer is Telstra for the provision of wireless
construction services where the bulk of contracts is in the upgrade of existing base stations and the
construction of new base stations for the Telstra wireless network.
C.
Energy & Water
Specialist metering and environmental services to utilities and government authorities nationally. The
main customers for meter reading are Western Power (WA), APA Gas (QLD, VIC, SA) and SA Power
Networks. There has been a significant decline in solar PV installations for SSM.
XVI. SWOT Analysis

A.
Strengths
SSMs key strengths are in its long term contracts and the on-going relationship with key
telecommunication companies such as NBN Co, Telstra and Vodafone Hutchison Australia. Its focus
around essential services such as energy, communication and metering means that it will strive to be a
long lasting business provided it can continue to deliver value at competitive costs for customers who
have heavily regulated margins. Its approach on the uptake of solar PV installation has been successful
by the demonstration of its mass deployments and response to demand during the solar boom.
[Ability to pick up and implement new technology quickly, Strong Customer Focus Valuable Operator
and Executor to Downer]
B.
Opportunities
There is growing demand in essential network services including the Australian Governments investment
in the National Broadband Network which it proves its competencies in areas such as New Estates and
Customer Connections. It has many opportunities to improve its backbone operating model by
implementing and introducing common processes and platforms which could reduce indirect costs
thereby increasing the overall capability of the company. As energy storage, demand management, smart
metering and in-home services demand increase, there is a big window of opportunity for SSM to take, in
the similar fashion which it has demonstrated in the solar boom.
During the companys growth stage, it is considering as both a weakness but also an opportunity to find
suitable sub-contractors during times of transformation and change management to remain competitive
but reduce overall indirect costs to the business. The company is looking for opportunities to improve its
talent acquisition both internally and the retention of sub-contractors nationally to maintain its position in
the market amidst growing demand through Workforce Management System.
[Opportunities to improve its efficiencies with better BMS and stronger backbone business operations
Downer can provide]
C.
Weaknesses
The company demonstrates contractual weaknesses in being to only secure standby contracts (as
opposed to volume contracts) mainly due to clients purchasing power and a combination of overhead
mismanagement. It accepts that there are many improvements to be made in the commercial
administration of these contracts as a result. Long term contracts continue to be a risk for the company as
there is inherent need to renew and/or extend these contracts on an on-going basis through customer
relationship and engagement.

[Weakness in contracting and backbone operations Downer can provide]
D.
Threats
SSM understands that there is risk of losing business to competitors either through their leverage of
potentially more cost effective business platforms or as a consequence of their potential adoption of lossleading strategies to maintain market share (which SSM cant afford to do so).
[Competitors are already acquired by large companies and have stronger financials Downer can
provide]
i
Annual Report 2014. Downer EDI
ii
The Ausie towns destroyed by Chinas economic slowdown, news.com.au,
http://www.news.com.au/finance/business/the-aussie-towns-destroyed-by-chinas-economicslowdown/story-fnkgdg1h-1227262601440
iii
Iron Ore Carnege:West Austrlaian mines could close by July, Sydney Morning Herald, March 7,215.
http://www.smh.com.au/business/mining-and-resources/iron-ore-carnage-west-australian-mines-couldclose-by-july-20150306-13x1ix.html
iv
Oil slump stalls sector projectds, Sydney Morning Herald, January 8, 2015
http://www.smh.com.au/business/mining-and-resources/oil-slump-stalls-sector-projects-2015010712jkwn.html
v
Annual report 2014, AusNet
vi
AusNet IBIS World Company Premium Report, Growth and Ratios
vii
2011 to 2051 total population, households and dwellings.xls, Department of transport, planning and
local Infrastructure, VIF 2014 Data Tables.

viii
Electricity Transmission Revenue Proposal 2014/15 2016/17, SP AusNet

MGSM858 – Downer's Acquisition of UGL

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MGSM858 Corporate Acquisitions

(ASX: UGL AU)

Downer EDI Limited (ASX: DOW AU)

Qiao Nan Han

Thomas Kak Hoo Chan 42545897

Executive Summary .............................................................................................................................. 6

Business and Product Portfolio ......................................................................................................... 7

Downer Infrastructure .................................................................................................................... 7

Downer Mining .............................................................................................................................. 8

Downer Rail ................................................................................................................................... 8

Downers Purpose (Vision) ............................................................................................................ 9

Downers Promise (Mission) ......................................................................................................... 9

Macro Environment ......................................................................................................................... 11

PESTLE Analysis ............................................................................................................................ 11

Major Domestic Players (ASX Listed) ......................................................................................... 12

Key Trends and Drivers .............................................................................................................. 12

Demand from Heavy Industry construction activities .................................................................. 12

Competitive pressures ................................................................................................................ 12

Cost pressures ............................................................................................................................ 13

Optimism on Telecommunications Sector .................................................................................. 13

Infrastructure, rail and mining services face lower demand ........................................................ 13

Global Economy .......................................................................................................................... 14

Strength - Diversified Business Operations ................................................................................ 15

Strength - Strong Customer Base ............................................................................................... 15

Strength - Enhanced Solvency Position ...................................................................................... 15

Weakness - Limited Liquidity Position ........................................................................................ 15

Weakness - Overdependence on Australia ................................................................................ 16

Opportunity - New Contracts Wins .............................................................................................. 16

Opportunity - Positive Outlook of NZ Construction Industry ....................................................... 16

Threat - Volatile Input Prices ....................................................................................................... 16

Threat - Increase in Minimum Wages in Australia ...................................................................... 17

Threat - Australian Construction Industry ................................................................................... 17

Acquisition Approach .......................................................................................................................... 17

Motivation of M&A ........................................................................................................................... 17

Explanation of potential target evaluation process ......................................................................... 19

Target Shortlist - SWOT Analysis ............................................................................................... 19

Target Screening and Scorecard Matrix ..................................................................................... 19

Screening and Score card............................................................................................................... 21

Due Diligence .................................................................................................................................. 23

Target and Acquirer's Financial Performance ................................................................................. 23

Targets Quality of Earnings ............................................................................................................. 27

Regulatory Matters .......................................................................................................................... 28

Australian competition and consumer commission (ACCC) ....................................................... 28

Australian stock exchange (ASX)................................................................................................ 30

Legal Proceedings ...................................................................................................................... 30

Due Diligence Limitations ................................................................................................................ 32

Target Valuation (UGL) ................................................................................................................. 35

Management Control Valuation (UGL) ........................................................................................... 38

Pre Synergy Valuation .................................................................................................................... 41

Post Synergy Valuation (DOW-UGL) ............................................................................................ 42

Deal Structuring .............................................................................................................................. 47

Strategic Takeover .......................................................................................................................... 47

Initial Strategy + Bid ........................................................................................................................ 49

Pre-Bid Acquisition ...................................................................................................................... 49

Balance Acquisition ..................................................................................................................... 49

Conditions of Bid ......................................................................................................................... 49

Board Transition Arrangement ........................................................................................................ 50

Implementation and Integration Planning ....................................................................................... 51

Appendix 1 Downer Business Portfolio Services ......................................................................... 57

Appendix 2 Downer Business Portfolio Analysis BCG Matrix Analysis .................................... 59

Appendix 3 Downers Purpose, Promise and Four Pillars ........................................................... 60

Downers Purpose (Vision) .......................................................................................................... 60

Downers Promise (Mission) ....................................................................................................... 60