Aecon’s strong backlog to cushion blow of losing China deal: analysts

Outlook bullish for construction giant that has won several major project bids

The federal government’s decision to block Aecon Group Inc.’s takeover by a Chinese statebacked buyer is a blow to the company in the short term as it seeks a new direction and searches for a new chief executive, analysts say.

Aecon shares plummeted more than 15 per cent on Thursday following the decision, ending the day at $14.67 at close on Thursday, below the $16.60 average over the four months before the deal was first announced last year. China Communications Construction Co. Ltd. (CCCC) had offered $20.37 per share to buy Aecon, worth roughly $1.5 billion when the proposal was announced.

Despite the setback, Aecon remains on firm footing after securing several major project bids in recent months, according to analysts.

“Takeout or not, we argue the construction giant is a stronger company now than it was prior to the transaction announcement, and will eventually be valued as such,” Raymond James analyst Frederic Bastien said in a note Thursday. It left its target price at $20.37.

The Canadian Imperial Bank of Commerce analysts also said that the company’s outlook “has improved substantially ” since the deal was announced.

Aecon recently secured a $1.2-billion contract for the Réseau express métropolitain (REM) light rail project in Montreal, and a $400-million order for Toronto’s Finch West light rail expansion project. It is bidding on other light rail projects in Ottawa and Hamilton. It pulled out of its bid to construct the Gordie Howe bridge earlier this month, amid speculation that it could be restricted from building the project under Chinese ownership.

Bastien said Aecon’s backlog is now the largest in the company’s history, despite its oil and gas and mining divisions performing below potential.

AltaCorp Capital, which predicted “a very low probability” of the deal being approved, expects Aecon shares to suffer in the interim after the failed process.

“In the current scenario, we believe shares could trade as low as 3.75-times forward EBITDA, implying a fair value of $13.00,” Chris Murray, managing director at AltaCorp, said in a note to clients.

The company also has to contend with the departure of CEO John Beck, who founded the company. Aecon said it was looking for a new chief executive and Beck will remain until a successor is selected.

“Aecon most likely has to resume new CEO search, despite strong ‘stewardship’ provided by Beck,” said Maxim Sytchev of National Bank, noting that investors shouldn’t expect another bidder

The construction giant is a stronger company now than it was prior to the transaction announcement.

emerging shortly, as it’s unlikely another entity would be willing to pay the same premium for Aecon’s assets as CCCI’s proposal.

CIBC noted that while there were other bidders as part of the sale, an immediate bid appears unlikely.

The decision to block the deal came after months of intense opposition due to national security and competitive concerns. Canada has not been clear on its approach to accepting Chinese capital, causing uncertainty for companies looking to secure foreign support, according to a security expert.

“We haven’t exactly zig-zagged, but we have not exactly had a clear position,” said Ward Elcock, the former director of the Canadian Security Intelligence Service.

But he also cautioned against being too transparent about national security decisions, saying “if you have to draw too many lines in the sand you could wind up damaging the relationship more.”

Meanwhile, domestic construction firms argued that the transaction could make them less competitive against a deep-pocketed state-owned company with access to a big pool of capital that could outbid them on future projects.

Mary Van Buren, the president of the Canadian Construction Association, applauded the decision, saying she was satisfied that “the government recognizes the fact that government-owned or controlled entities have no place to compete against private and publicly traded companies in the Canadian construction industry.”

Van Buren said in an earlier interview that the acquisition threatened to “fundamentally change the landscape” of how firms bid for projects. Aecon is a member of the CCA.