URS Koffel buy adds depth to URS.

Martin M. Koffel, chairman and CEO of URS Corp., was set to retire at the end of 2006, but his directors convinced him to stay on. Good thing they did. The U.K.-born financial expert had one more deal up his sleeve: the purchase of Washington Group International.

On May 28, the two firms announced that URS, San Francisco, would buy WGI, Boise, for $2.6 billion in cash and stock to create a publicly owned giant with $8.6 billion in expected 2007 revenue, an $11-billion backlog and 54,500 employees. “The combination with WGI is the next logical step for us to take,” says Koffel. “Clients like to see you’re running under the same rules they are.”

Hanks

WGI President Stephen G. Hanks told analysts May 29 in New York City that the company would become a “stand-alone division” of URS, still under his leadership. There likely would be further integration later, he acknowledged. WGI shareholders will receive a substantial premium when the deal, of which 55% will be paid for in cash, closes as expected later this year.

Among the shareholders is WGI Chairman Dennis Washington, also known for dealmaking, particularly his investment in then-bankrupt Morrison Knudsen Corp. in 1996. Washington beneficially owns or has options for about 3.2 million WGI shares.

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But Koffel’s brand is all over this deal. “This has created a single-source provider,” he says. “It is a very compelling transaction.” Hanks says WGI did not shop itself. “URS contacted us four or five months ago,”  he says, noting the deal was sealed on May 28 “in the wee hours.”

Koffel’s timing was fortunate.  Construction has been enjoying a honeymoon on Wall Street, especially companies in the power and defense sectors. AECOM Technology Corp., Los Angeles, last month raised $472 million in its initial public offering of stock.

The price URS is paying for WGI is evidence of low-cost debt financing, says Andrej Avelini, vice president of EFCG Inc., a New York City-based merger and acquisitions consultant. “The valuation is incredible,” he says. “WGI is trading at 24 times after-tax earnings. URS is paying 15% premium over that.” Hanks says the price is a “fair and full value offer for the company. [The deal is] beneficial [to WGI shareholders]. They get cash and 31% of URS.”

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Hanks notes that the two firms’ cultures fit. “We are both conservative toward taking on risk,” he told analysts.

So far, Koffel has been able to pay down URS’ considerable debt related to financing past purchases. “URS can support the debt we’re taking on to finance this acquisition,” he says. URS will have $1.5 billion in debt after the deal closes.

Koffel and Hanks say the link would offer each firm entre´ to new markets and capabilities, particularly in the power sector. It would create the industry’s largest team of nuclear scientists, Koffel says. The two firms have more than $1.3 billion in combined power revenue, executives say.

Hanks says that power and other key WGI market niches are poised for explosive growth in the next decade. WGI anticipates new access to the URS stable of clients through its master service agreements, while WGI offers construction capacity. “We don’t have those relationships,” says Hanks. Koffel says 45% of the megafirm “will have the U.S. government as a client.”

WGI was profitable and reported earnings for 2006 in line with its estimates. But Standard & Poor’s said on May 29 that it might downgrade its debt rating on URS. “The acquisition grants URS some improved business capabilities, such as additional scale, diversity and nuclear power expertise,” S&P said. But “the increased leverage will weaken the company’s financial risk profile.”