Renew’s £19.8m acquisition sees shift to specialist sectors

RENEW Holdings has bolstered its engineering business with a “transformational” £19.8m acquisition to increase its focus on the rail and energy sectors.

The Leeds-based engineering and construction group said buying Amco Group Holdings from private equity house Endless will boost its profits and broaden its expertise.

The purchase accelerates Renew’s strategy of shifting away from construction towards higher-margin specialist engineering, which will make up more than 50 per cent of its revenues once the deal completes.

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Shares in the Alternative Investment Market-listed company soared 23.7 per cent yesterday to 60p. House brokers Brewin Dolphin upped their forecasts for the group, noting the deal is “immediately earnings enhancing”.

“It’s a really important deal for us,” said Renew finance director John Samuel. “It fulfils the strategy that we’ve had in place for some years.”

Renew paid £19.8m in cash up front for the business, and will pay another £7.1m deferred sum which will not require more cash. The deal, formally a reverse takeover, needs shareholder approval at a meeting on February 23.

“The acquisition of Amco allows Renew to increase and broaden the scale of its specialist engineering operations, as well as adding to the range of services we can provide to our customers,” said Renew chief executive Brian May.

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Barnsley-based Amco is expected to have earned revenues of £75m in 2010, and has a £100m-plus order book.

It has clients including Network Rail, E-On, National Grid and Scottish & Southern Energy. Rail work makes up about 52 per cent of its sales, with most projects “non-discretionary”. Its work includes repairing tunnels and shafts, refurbishing stations and installing electrical plant gear.

Amco’s energy and engineering work involves a number of framework contracts, and includes maintenance at power stations such as Ferrybridge in West Yorkshire.

Amco’s 700 staff will grow Renew’s workforce to about 2,100. Its work does not overlap with Renew’s existing operations.

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The enlarged group’s revenues are forecast to hit £400m in 2012, from a previous expectation of £320m. Its profits are forecast to grow to £9.5m in 2012, compared with the £5.6m previously anticipated by Brewin.

Renew secured a £15m debt facility from HSBC for the deal, which Mr Samuel said leaves it with low gearing and substantial cash for other acquisitions.

Renew first looked at Amco in April 2009 and returned to it a year later.

“In the last two years we’ve probably put in something like seven or eight indicative offers for different businesses, none of which have materialised,” said Mr Samuel. “We’ve experienced vendors’ price expectations being too high. It’s been quite difficult to find the right pricing and quality.

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“That’s not the case (with Amco) because it’s a quality business. This is a good deal for us and good deal for Endless.”

Brewin analysts said the deal is “transformational” and moved to a “buy” stance. They added: “Although Amco is a much larger deal than any of the group’s other acquisitions we believe Renew’s management team has the proven capability to successfully integrate it within the group.”

The sale marks a successful exit for Leeds-based Endless, which backed a £9.4m management buyout of the business, along with drilling and property companies, from Amco Corporation in 2008.

Endless partner Darren Forshaw, who led the sale, said: “Amco is an outstanding business and has been a first class investment for Endless, I feel privileged to have been involved in the successes of the past three years. Since the MBO, annual profits have increased more than threefold and the business has expanded its activity across all of its key markets – this at a time when most of its peers have experienced declining turnover and profits.”

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Barry Jackson, from Deloitte, said “This is a completely Yorkshire-centric deal with all principals and advisers based in the region.

“We were tasked with finding the right buyer for this very strong Yorkshire business in what still remain challenging market conditions. The acquisition demonstrates that good quality deals are getting done and is another indicator that activity is gradually increasing in the M&A markets.”

Renew was advised by Brewin Dolphin, DLA Piper and KPMG. Endless was advised by Deloitte, with Hill Dickinson providing legal advice.