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Why the NRW share price is surging to the top of the ASX 200 leader board

The NRW Holdings Limited (ASX: NWH) share price is rocketing higher after management confirmed it’s in pole position to acquire BGC Contracting.

The NRW share price surged 15% to $2.59 in after lunch trade to become the top performer on the S&P/ASX 200 (Index:^AXJO) (ASX:XJO) index. In case you are wondering, the Pilbara Minerals Ltd (ASX: PLS) share price is in second position with a 7.3% jump to 37 cents while the Galaxy Resources Limited (ASX: GXY) is close behind with a 6.2% increase to $1.04.

NRW beats rivals to BGC

NRW issued a statement confirming that it was picked as “the preferred bidder” for the business, subject to final documentation and a number of so-called customary conditions for such a transaction.

Management was quick to point out that there is no guarantee that the deal will be consummated though as it needs to apply “a similar discipline to previous transactions (Golding Group and RCR Mining Technologies) on terms that deliver appropriate value for NRW shareholders, including a requirement that any transaction be EPS accretive”.

In other words, NRW is still crunching the numbers to ensure that it’s getting value of money, but I would be surprised if the deal didn’t go ahead.

It looks like NRW has beaten Emeco Holdings Limited (ASX: EHL) to the punch as the equipment leasing company also expressed interest in BGC Contracting in the past. It’s perhaps no coincidence that the EHL share price tanked 4.8% to $1.64 this afternoon.

Is a capital raise coming?

What may also be buoying the NRW share price are comments from management that it has several options when it comes to funding the transaction. This means it may not need to undertake a capital raise, which is usually a drag on a stock.

“Furthermore, any transaction would include the assumption of outstanding equipment finance obligations of approximately $190M, which is well supported by a considerable fleet of major mobile equipment,” said the company in its ASX release.

But the surge in NRW’s shares may convince management otherwise, especially because the group may not be done with acquisitions.

Other targets on the auction block

It was revealed that NRW wasn’t only talking to BGC and it had stated during the August reporting season that it was looking to further diversify its revenues through takeovers.

There are a number of companies who have hung a “for sale” sign on their contracting divisions too. This includes the likes of Lendlease Group (ASX: LLC) and Downer EDI Limited (ASX: DOW).

It’s a great time to be cashed-up in the sector and the merger and acquisition (M&A) fever isn’t restricted to contractors alone. Independence Group NL (ASX: IGO) today announced it was making a play for its smaller peer Panoramic Resources Ltd (ASX: PAN).

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Returns as of 6th October 2020

Motley Fool contributor Brendon Lau owns shares of Downer EDI Limited. Connect with him on Twitter @brenlau.

The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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