Nedlands-based diesel maintenance company Coote Industrial Ltd has announced plans to acquire rail services provider South Spur Rail Services Group in a cash and scrip deal worth $25 million.
Nedlands-based diesel maintenance company Coote Industrial Ltd has announced plans to acquire rail services provider South Spur Rail Services Group in a cash and scrip deal worth $25 million.
The deal, expected to be $11 million in shares and the remainder in cash, is expected to be completed by the end of June.
South Spur managing director James Wilson will take on the role of Director of Rail Operations for the Coote Industrial Rail Division, after selling the company the Wilson family established in 1997.
The full text of a company announcement is pasted below
Coote Industrial has reached in-principle agreement to acquire rail services provider South Spur Rail Services Group.
Strategic Value
This acquisition creates a unique position for Coote Industrial in the Australian rail services market, underpinned by significant barriers to entry and opportunities for real innovation in service and industry market niches. The new combined business (which will be known as the Coote Industrial Rail Division) is positioned strongly to take advantage of current levels of investment in mining-based and east-coast rail infrastructure development without the level of capital intensity that characterizes traditional broad-based rail operations. Services include training, accreditation, locomotives (both as work trains and shuttle trains), track build and maintenance, specialised rail equipment overhaul, maintenance, major locomotive overhauls and rebuilds, engineering services and specialised rail labour hire.
"We believe in addition to South Spur Rail Services own substantial rail growth potential, the acquisition will put Coote Industrial sigificantly ahead of its strategy for growth in the rail servicing, maintenance and refurbishment business. The synergies make South Spur Rail Services a perfect match for Coote Industrial, we anticiapte solid organic growth from the combined ideas and endeavours of both Group's" said Mike Coote Chief Executive officer.
South Spur provides specialised services to the national rail industry through several operating entities:
- South Spur Rail Services supplies fully crewed work trains for infrastructure and track maintenance projects;
- Momentum Rail provides recruitment and hire of qualified rail personnel to track owners and rail operators;
- Centre for Excellence in Rail Training is an accredited rail training organisation;
- Southern and Silverton operates its own and leased locomotives and rolling stock in line-haul, hook-and-pull and port shuttle operations, mainly in New South Wales;
- Australian Rail Mining Services provides rail services to the mining industry;
- "Spirit of the West" is a restaurant train which operates in the Western Australian tourist market.
South Spur employs over 200 staff and a further 200 contractors. The business was established in 1997 and was developed to its present size in ten years by the well-known Western Australian Wilson family, under the leadership of Managing Director, James Wilson.
James will take on the role of Director, Rail Operations in the Coote Industrial Rail Division.
James Wilson said, "We are very pleased with the outcome: South Spur Rail Services has grown rapidly over the past 10 years, with many opportunities for further growth, but required considerable additional financial and administrative infrastructure to continue that growth. We recognised it would be a difficult task for a family company to achieve. As we have known and worked with Coote Industrial for some time and recognized that they already have the infrastructure in place as well as being able to provide a pool of rail engineering and locomotive maintenance experience, put together with our existing rail businesses, is a logical and positive step for both companies."
Strategic Consistency
The acquisition is consistent with three of four strategic objectives identified by the Board and outlined in the Prospectus issued prior to listing in December last year:
- Establish a greater presence in each state of Australia;
- Establish major locomotive maintenance and service centres;
- Continued growth through acquisitions.
Financial
The purchase is expected to be completed in two tranches, the final tranche being on 29 June 2007, for a total of $25m, of which $11m will be in shares and the balance in cash. All shares will be subject to voluntary escrow for six months.
The price is based on a projected FY 2008 NPAT multiple of 6.1 times. (Multiples for recent Coote Industrial acquisitions were: Hedemora Diesel AB 3.3 times NPAT, Convair Engineering 5.0 times NPAT and Asset Kinetics 4.7 times NPAT.)
For comparative purposes, the financial impact on a consolidated Coote Industrial including South Spur Rail Services in the 2008 financial year is expected to be:
- Sales Revenue increase from $56.5m to $125.9m;
- NPAT increase from $6.6m to $10.7m.
This assumes any increase in FY08 performance from the existing Coote Industrial Group from anticipated results for the 2007 financial year is applied to the acquisition debt costs.
On the above basis, the acquisition is expected to be earnings per share accretive in the 2008 financial year.
The cash component will be through new debt facilities, increasing total debt (on a consolidated basis including South Spur Rail Services) to $25m, resulting in a debt/equity ratio of 31% on completion.
