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ABM Industries Inc. (ABM - Analyst Report) has acquired Irvine, California-based The Linc Group, LLC (“TLG”) for a cash consideration of $300 million. With this transaction, ABM Industries is expected to join the ranks of the Fortune 500. ABM Industries expects the deal to be slightly accretive to fiscal 2011 earnings and more so in fiscal 2012.

The Linc Group is a global provider of technical building services, comprehensive green solutions, and other training and support services. The services offered by this company help improve operating efficiencies, protect assets, lower cost of ownership, reduce energy consumption, and create healthy and safe environments for thousands of commercial, government, and residential clients. In 2009, TLG generated revenues of $579.2 million.

The acquisition will strengthen ABM Industries’ leadership role in the facilities services industry. The combination of two entities – ABM Industries’ Engineering Division and TLG – both of which boast double-digit growth in sales and earnings will earn $1 billion in revenues. With this acquisition, ABM Industries will be able to deliver leading client solutions to meet the global drive toward green buildings and energy efficiency.

This transaction also opens up the $70 billion government marketplace for the company, where TLG already has broad experience and sound client relationships. By leveraging the existing businesses of both TLG and ABM, clients can avail of truly integrated facility services and turn-key, in-house solutions. The Linc Group brings with it existing relationships and good work in the government sector, expanding international operations, and technology-oriented capabilities, including highly complicated energy efficiency work and retrofitting.

Refinancing of Credit Facility

In a separate development, ABM Industries announced the successful refinancing of its credit agreement. As part of the refinancing, ABM Industries increased the total borrowing capacity to $650 million, with an additional $200 million option. The term of the agreement has been extended to November 2015. A $50 million sublimit was also added for certain foreign currency borrowings. Further, the permitted acquisition restriction was adjusted to provide for additional flexibility.

Under the facility, the interest rate is determined at the time of borrowing based on LIBOR (London Interbank Offer Rate) plus a spread of 1.50% to 2.50%. The successful execution of the credit facility and added borrowing capacity should provide ABM Industries with additional liquidity to fund its strategic and growth initiatives for the next several years.

As of July 31, 2010, the company held a $450 million five-year syndicated line of credit that was scheduled to expire on November 14, 2012. As of July 31, 2010, the total outstanding amount under the Facility in the form of cash borrowings was $150 million. Available credit under the line of credit was up to $196.2 million as of July 31, 2010.

Our Take

ABM Industries’ Engineering Division contributed 10% to total revenues in the third quarter and posted the highest revenue growth among segments at 14%, driven by sales to both new and existing clients. Operating profit at the segment increased 21% year over year to $5.9 million.

ABM Industries reported third-quarter 2010 operating earnings of 36 cents per share, lagging the Zacks Consensus Estimate of 41 cents. However, the results compare favorably with 30 cents reported in the prior-year quarter. Total revenue in the quarter declined 0.2% year over year to $869 million. It also fell short of the Zacks Consensus Estimate of $890 million.

ABM Industries depends on acquisitions for growth. However, the company had been relatively quiet on the acquisition front over the past two years. The last significant deal of OneSource for $390.5 million came in 2007. The company made one small acquisition during 2008 and another during 2009. In June 2010, its Janitorial Division acquired Diversco Inc., a provider of outsourced facility services, for $30.3 million. The acquisition expanded the geographic reach of the company’s janitorial and security businesses, particularly in the Southeast, Midwest and Mid-Atlantic regions of the United States. The acquisition of The Linc Group for $300 million thus comes after a while.

The company’s top-line growth is restricted by the decline in commercial office building occupancy and rental rates in the U.S. The company currently retains a Zacks #4 Rank (short-term Sell recommendation) on the stock. We maintain an Underperform rating on the stock in the long term.

ABM Industries Inc. operates through its subsidiaries and is the leading provider of facility services in the United States. The company provides janitorial, facility, engineering, parking and security services for thousands of commercial, industrial, institutional and retail facilities across the United States, Puerto Rico and British Columbia, Canada. Its business services include ABM Janitorial Services, ABM Facility Services, ABM Engineering Services, Ampco System Parking and ABM Security Services. It competes with privately held ARAMARK Corporation, Central Parking Corporation and UNICCO Service Company.

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