Engineering services group Renew Holdings is to buy leading Scottish railway contractor QTS Group for £80m.
Leeds-based Renew, which is to raise £45m to help pay for the deal, said QTS is an excellent fit with its established and proven acquisition strategy.
QTS has a longstanding relationship with Network Rail, operating under long-term framework positions, and Renew said it is well positioned for Control Period 6 where Network Rail’s spending will focus on renewal and maintenance.
Analysts welcomed the deal.
Howard Seymour at Numis said: "The acquisition of QTS provides two major positives in our view.
"First, QTS operates a similar business model to Renew (and Amco in rail) so the acquisition provides a range of complementary services and geographic potential that will offer significant organic opportunities for growth in service provision to Network Rail.
"Second, the acquisition is taking place a year ahead of the structural shift in rail spending, which will give rise to a 25 per cent increase in Network Rail operating expenditure over 2019 to 2024.
"The enlarged group will have the highest relative exposure to this major opportunity of all our universe, so Renew will be the best way to invest in this area in our view."
Renew said the acquisition will increase its market share, footprint and specialist positioning in the rail market, which has high barriers to entry and the deal will add complementary services to the group's existing rail offering.
It said the acquisition and placing are expected to be "materially" earnings enhancing and the return on investment is expected to comfortably exceed Renew’s cost of capital.
Completion of the acquisition will take place on May 10, following completion of the placing.
Paul Scott, CEO of Renew, said: “This is a very complementary and earnings enhancing acquisition that aligns with our established and proven strategy, strengthening our position in the UK infrastructure market.
"QTS has grown to become a leading and well respected brand in the rail sector and we very much look forward to supporting its ambition for continued growth including opportunities via collaboration across our expanded range of services in this sector.”
Alan McLeish, managing director of QTS, added: “QTS is delighted to be joining the Renew Group and we very much look forward to the future as part of a larger group.
"The transaction will provide opportunities to expand our market share and benefit from the synergies with their existing successful brands working in highly regulated sectors.
"It was important to attract an owner with relevant expertise to support our growth ambitions without compromise to customer service or staff loyalty, the Renew business model fits perfectly with these aspirations.”
The net proceeds of the placing will be used to fund part of the consideration, with the balance to be funded from new debt facilities provided by Renew’s existing lending bank HSBC, comprising a £35m four year term loan, £20m revolving capital facility and £10m overdraft facility, which together replace all existing debt facilities.
Ben Andrews, HSBC's managing director & head of large corporate North, said: “HSBC has enjoyed a strong relationship with the Renew Group over a number of years and we are delighted to support the group with their acquisition of QTS, which reinforces the ongoing investment in their core rail services business.”
Renew said the placing will allow it to maintain a strong balance sheet with a conservative gearing level, in line with its strategy. On a pro forma enlarged group basis, Renew’s net debt will represent less than one times historic EBITDA.
All of Renew's directors will subscribe for placing shares.
Walker Morris advised Renew on the proposed acquisition of QTS.
Walker Morris fielded a team of multidisciplinary specialist lawyers to advise Renew on the acquisition and placing including: Debbie Jackson, Richard Naish, Laura Cavell and Sonia Lonsdale (Corporate), Peter Considine and Laura Lister (Banking & Finance), Andrew Rayment and Charlotte Smith (Employment) and Sarah Bruce (Tax).
Ms Jackson said: "Renew is a long-standing client of the firm and it is particularly satisfying to see them go from strength to strength.
"We've advised them on a number of acquisitions in the past including Clarke Telecom Limited and Giffen Holdings Limited. This latest transaction will reinforce their proven strategy to achieve growth through selective acquisitions."