Macquarie Capital launches UGL sale plan as CIMIC looks to cut debt

UGL’s transport division has built over 11,000 locomotive wagons and has maintained 3000 rail passenger cars. Picture: Inland Rail

Investment bank Macquarie Capital is understood to have launched plans to sell UGL’s $1bn transport division that is owned by CIMIC Group, and two high profile private equity firms are believed to be among those weighing up a purchase.

Australian industrial CIMIC is owned by Spanish parent ACS, which is offloading the asset to reduce its debt.

On offer is a unit that services various different transport functions.

Sources have suggested that Pacific Equity Partners and Kohlberg Kravis Roberts are taking a look. However, it will be interesting to see if they progress in the contest.

One market expert said the pair could be put off by the offering being a low-margin business, which makes it harder to lend against.

Another said that the business would have more risk than they would be prepared to absorb.

However, one possibility is a break-up of the unit, and PEP and KKR may put in an offer for part of the business.

Among its capabilities are train and bus manufacturing, rail track maintenance and public transport services.

Another option is that CIMIC sells only a major stake in the operation.

UGL’s transport division has built over 11,000 locomotive wagons and has maintained 3000 rail passenger cars, with state governments its major clients.

Although the business lags the No1 player in the market, which is Downer, it has been highly profitable for the group.

UGL’s transport unit is understood to generate about $1.5bn in annual sales and more than $100m of earnings, and market estimates suggest it could trade for well over five or six times that number.

The understanding is that ACS is under pressure to recycle funds as CIMIC also faces costly claims on building projects.

For its 2024 financial year, ACS made €827.6m ($1.4bn) of annual net profit, but at March, its net debt was €2.8bn.

ACS’s Australian subsidiary, CIMIC, bought UGL in 2016 for $524m following a takeover battle for the locally listed engineering services provider.

The sale is timely, as it comes amid a period in the market where buyout funds are shifting their attention for acquisitions to companies that provide services to governments amid a period of weaker consumer spending after higher interest rates since the global pandemic.

UGL describes itself as the only contractor in Australia to offer in-house design, construction, commissioning and operations and maintenance across road and rail networks.

It operates five major public transport businesses in Melbourne, Canberra, Sydney, Adelaide and Auckland.

For 2024, CIMIC generated a 26 per cent increase in its earnings before interest, tax, depreciation and amortisation to €10.2m, as it bought an additional 10 per cent stake in Thiess, taking its overall holding in the strongly performing mining services provider to 60 per cent.

Previously, CIMIC has embarked on deals for assets with private equity groups like Apollo Global Management and Elliott Management.

In 2014, when CIMIC was known as Leighton Holdings, it sold a 50 per cent stake in its services unit to Apollo Global Management for $700m and that unit was renamed Ventia.

The pair then listed the business in November 2021 as a $2bn-plus company, with an initial public offering worth about $350m.

Elliott Management also bought half of CIMIC’s mining services provider Thiess.