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Jacobs (J) Plans to Acquire Majority Stake in PA Consulting

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Jacobs Engineering Group Inc. (J - Free Report) announced that it intends to acquire a 65% stake in PA Consulting, a leading innovation and transformation consulting firm, for an enterprise value of 1.83 billion euros ($2.4 billion). Jacobs expects the transaction to close by the end of second-quarter fiscal 2021. Shares of the company gained 1.87% during the trading session on Nov 30.

Financial Terms of the Deal

Jacobs will take over a 65% stake in the form of preferred and common equity. The remaining 35% interest will be held by PA employees, following the exit of existing majority stakeholder, The Carlyle Group Inc. (CG - Free Report) .

Preferred equity holders receive a 12% compounded annual coupon accrual. A sweet equity incentive pool of 25% of the common equity is available for issuance to current and future partners, as well as employees of PA.

Jacobs intends to fund the transaction through a combination of cash on hand, and existing as well as incremental debt facilities. It will provide debt financing to PA through a 650-million euros ($845 million) term loan and a revolving credit facility of up to 100 million euros ($130 million).

The transaction will be implemented by way of a U.K. Scheme of Arrangement and is subject to the satisfaction of customary closing conditions.

Buyout Synergies

With the latest investment, Jacobs expects to add more than 52 cents to adjusted earnings per share in fiscal 2022, post the deal completion. PA has delivered solid growth over the last five years, with EBITDA more than doubling over the period. The company has achieved compound annual revenue growth of 12% since 2016.

Together, Jacobs and PA will team up to offer an end-to-end solution on projects. The partnership will combine strategic front-end consulting and deep domain knowledge across key sectors with next generation science, as well as technology expertise.

Jacobs chairman and CEO Steve Demetriou said, “We are on the cusp of the next digital revolution as advances across 5G-driven compute power, robotics, autonomous technology, machine learning automation and geospatial technology converge to provide solutions to many of the world’s most complex challenges, including disruption to traditional business models.”

It remains focused on transitioning from an engineering and construction to a global technology-forward solutions company. In sync with this, during fiscal 2019, it completed the Energy, Chemicals and Resources or ECR business divestiture. Also, acquisitions of KeyW and John Wood Group’s nuclear business position Jacobs as a leader in high-value government services and technology-enabled solutions, as well as enhance its portfolio by adding intellectual property-driven technology with unique proprietary C5ISR (command, control, communications, computer, combat systems, intelligence, surveillance and reconnaissance) rapid solutions.

Importantly, in November 2020, it launched the Focus 2023 initiative, with expected benefits of more than $200 million versus fiscal 2020. Through this initiative, the company has been accelerating the adoption of digital technology across all facets of operations. This move will include a reduction in physical real estate footprint by more than 30% as it significantly shifts to a more flexible and virtual workforce.

Jacobs expects this transformative initiative — which will provide it with the flexibility to materially invest in the business — to drive growth through technology-enabled solutions by 2023. Focus 2023 integration/transformation is expected to lead to $110 million of associated cash outflows in fiscal 2021. Also, this is expected to drive double-digit adjusted EBITDA growth in fiscal 2022.

Share Price Performance

Jacobs’ shares have outperformed the industry in the year-to-date period. The solid price performance was backed by an impressive earnings surprise history. The company surpassed earnings estimates in 11 of the trailing 13 quarters. The trend is expected to continue in the near term, courtesy of its solid performance in fiscal 2020 despite disruptions caused by the COVID-19 outbreak. Jacobs registered stellar growth in fiscal 2020. Revenues of $13.6 billion grew 6.5% and 2.5% on a pro-forma basis. Adjusted earnings were $5.48 per share, up 9% year over year. Adjusted operating margin expanded 9 basis points (bps) to 8.76%. Adjusted EBITDA came in at $1.1 billion, up 7.1% year over year.

Zacks Rank

Jacobs — which shares space with Quanta Services, Inc. (PWR - Free Report) and KBR, Inc. (KBR - Free Report) in the same industry — currently carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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