UGL Chief Executive Richard Leupen is considering unsolicited private-equity proposals for the contractor’s lucrative DTZ property business but has ruled out running a formal trade sale process, as the firm looks to finalise a demerger this calendar year.
Leupen said today the group would look at PE proposals for its $1.3 billion property arm over March and April but did not want to attract the wrong kind of bidders by running a formal auction.
“Putting the company in a sales process is destabilising, commercially unsettling and extremely risky,” Leupen said, speaking on a media call after unveiling a 13.5 per cent rise in the group’s interim net profit, to $29.5 million. “We were never running a (formal sales) process … We are headed down the path of a demerger.”
Mr Leupen said UGL was pushing to finalise a demerger by the second half of calendar 2014, after initially flagging the split would be executed more broadly in fiscal 2015. A trade sale was “certainly not the company’s preferred path” but the board felt compelled to examine the “significant private equity interest,” which could be in shareholders’ interests, he said. “We don’t like the idea of opening it up to wide ranging bids ... We are trying to put the company in its right home." A large trade player buying DTZ could have negative consequences, particularly in terms of “people assets” and synergies, he argued.
It has been speculated that Warburg Pincus and TPG Capital have been sounding out banks on funding options for a deal.
Leupen said the significant interest from private equity was understandable given UGL was a business in transition. UGL was last year restructured into two distinct businesses – DTZ Property and UGL Engineering. UGL engaged Goldman Sachs to start working on a demerger in August, spending $3.05 million on it in the first half, its interim results announced today show.
Leupen said part of the reason for the long timetable for executing the UGL demerger was reducing debt to levels acceptable for two separate companies to carry. UGL’s debt-to-equity gearing ratio is about 35 per cent, which was too high, Leupen said.
DTZ should be run out of the United States, given the country accounts for 60 per cent of its revenues, he said. The physical demerger of assets would be completed by June but the financial separation of the two businesses depended on achieving the right gearing, prompting the group to decline paying an interim dividend.
UGL bought DTZ’s trading assets – which now account for about 20 per cent of the overall DTZ business – out of receivership in 2011. The DTZ operation enjoyed an 18 per cent jump in revenue for the first half to $1.08 billion, while EBIT also grew to $58.3 million, on the back of a pick-up in the US corporate real estate market. DTZ’s order book is at $3.4 billion.
UGL’s engineering arm didn’t fare as well, with earnings down 40 per cent to $35.9 million, and revenues off 1 per cent to $1.152 billion. Increased competition and tighter margins amid a cost-cutting drive by the big miners had hurt earnings for the engineering contracting business. UGL may shore up its cash reserves for engineering through asset sales or an equity raising, with the former seen as the option favoured by shareholders.
Reports emerged yesterday that former DTZ chief Robert Shibuya had lodged a court case in the US alleging he was made to sign off on DTZ “cooking the books” and that he was a victim of discrimination. Leupen today said the claim was “vexatious and extortionate.” The case had 13 different allegations, “and if we wait another three months it will probably widen to 25," he said, adding the allegations had no basis in facts.
UGL issued a statement to the ASX today saying it would defend the claims vigorously and was examining potential counter claims. The statement said the “claims of financial manipulation and discrimination are completely baseless, and UGL notes that they are made in the context of a claim for monetary compensation for dismissal by a former employee.”