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Sinclair Knight Merz to merge with California engineering firm

With this week’s announcement that the US firm Jacobs Engineering Group (NYSE: JEC) will pay $1.3 billion to buy out Brisbane-based Sinclair Knight Merz (SKM), a privately held engineering and consulting business, the feeling in the air is that more mergers and industry consolidation will take place.

The deal will allow SKM, which already has 40 offices across Asia Pacific, the Americas, Europe, the Middle East and Africa, to complement its geographic presence, and merge its 6,500 staff with the 65,000-strong employees of the California firm. The merger proposal must be ratified by shareholders voting later at the end of the year in special meetings, but SKM’s board of directors have unanimously recommended it.

The $1.3 billion offer puts the enterprise value of SKM at about $1.2 billion. In 2012, the company’s total revenue was about $1.3 billion, and earnings before interest, tax, depreciation and amortisation was approximately $180 million. Based on gross earnings, that would give the deal a price-to-earnings ratio of 7.22.

What can we expect from the mining and mining services industries in light of this deal? This merger activity may be indicating that cashed-up companies consider the bottom of the market to be past us, and it is time to pick up good companies at good or great prices.

One company that offers an interesting counter to this is UGL (ASX: UGL), which is currently planning to demerge and create two ASX-listed companies, as we reported in August (“UGL has a better future with a split-up“). The DTZ property business segment will be spun off, leaving the engineering and operations and maintenance segments, which currently make up 55.5% of the $3.8 billion total revenue in 2013.

The demerger is expected to occur in 2015, yet the opportunity to buy them still together may be just as attractive.

Foolish takeaway

This is yet another sign of the Australian economy beginning to turn up. Rivals in good times and in bad are always sizing up competitors to see which would be good acquisitions or merger partners. They start to get active when the general business climate improves after a downturn, and many times wait until they see other companies start to make takeovers.

You can do the same, too, as you run the ruler over your potential stock picks. Estimate the attractiveness of a company for a takeover, and pick the ones that you think will sell at a premium.

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Motley Fool contributor Darryl Daté-Shappard does not own shares in any company mentioned. 

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