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Hyder purchase opens up UK infrastructure market to Arcadis

Arcadis’ £250M acquisition of consultant Hyder will afford the Dutch giant a platform to expand into the UK infrastructure market, chief executive Neil McArthur told NCE this week.

The acquisition takes Arcadis into regions where it does not currently operate in its core markets, described by McArthur as “infrastructure, buildings, and water.”

“We don’t have that capability currently in UK; Hyder gives us a UK presence in those markets,” he said.

The day before the deal was announced, Arcadis posted increased profits of 9% across its business for the first six months of 2014. Net revenue in infrastructure was flat against the same period last year but the UK and continental Europe contributed to its growth.

With EC Harris, Arcadis will effectively grow its UK business by around half to £264M.

The firm has identified “cross-selling opportunities” from the acquisition, with EC Harris and Hyder likely to work closely.

In the Middle East, it will double in size to £143M, and the Dutch outfit also gains a foothold in Australia for the first time, where Hyder revenues are £63M.

McArthur is positive about the growth potential in those markets.

“In the UK, over the next four to five years, there is annual growth of 5% to 7% predicted,” he said. “And annual of growth of 8% to 10% in the Middle East.”

Arcadis has not decided whether to retain or ditch the Hyder brand.

McArthur said he hadn’t “ruled in or out” keeping the Hyder name, but said there was “value” in the brand.

“Arcadis has 11 active brands operating within the group,” he said. “So we’re quite happy having ‘sub-brands’ within the business.”

One of these is project manager EC Harris, which joined the Arcadis empire in 2011. That was badged a “merger”, whereas the Hyder deal was described as an “acquisition”.

But McArthur said Arcadis would use “the same integration process [for Hyder] as for EC Harris”. He added: “Hyder is a closely-aligned business to Arcadis in terms of culture, with complementary values, and has a similar operating structure, with regional profit-and-loss centres.”

Assuming the acquisition is rubber-stamped by Hyder shareholders in September, Arcadis will begin a “synergy” process which will identify savings and assess how to fit Hyder into the current group structure, including whether to retain the name.

Arcadis estimates it can realise around £15M of synergy savings by the end of 2016, split between revenue growth and operations.

“We will look at operating synergies, at the real estate footprint, and at corporate and support functions where there will obviously be overlap,” said McArthur. “But less than 1% of the current Hyder workforce will be affected.”

Arcadis has been impressed by Hyder’s design excellence centres, based in the Philippines, India and Jordan. These centres employ around 900 staff - 20% of the firm’s workforce - and deliver detailed engineering design work for Hyder businesses around the world. McArthur describes them as a “high quality but lower cost delivery model”. He expects to identify cost savings through use of these centres as part of the synergy process.

Arcadis eyeing further acquisitions after Hyder deal?

The expansion plans of Arcadis are unlikely to end with the £250M Hyder purchase.

“We are always on the lookout for further, complementary acquisitions, which fit with our priorities,” Arcadis chief executive Neil McArthur told NCE.

With the Hyder deal, Arcadis will grow into a £2.3bn-turnover business, employing nearly 27,000. Hyder posted revenue of £297M in its last set of results, and employs around 4,500.

So Arcadis is now “a very substantial firm”, as analyst and Manchester Business School professor Bruce Tether puts it. “Moreover, it has grown rapidly, partially by acquisitions; 10 years ago it had less than 10,000 employees and an income below £800M. So you can see that it is ‘going places’.”

Last December, the Dutch-headquartered firm announced an expansion plan as part of its 2014-16 strategy, which included organic and inorganic growths target of 5%. The Hyder deal smashes through that target.

As part of the strategy, Arcadis has identified three “priority” market sectors – emerging markets, big urban clients, and natural resources – plus four areas where it believes it can add value: environment and water; program management; business advisory; and design.

McArthur said the plan would “result in industry leading returns to our shareholders over the coming years.”

So does this mean Arcadis is heading into the Aecom/URS mega-league?

Tether isn’t sure: “The combined Aecom and URS will be much bigger, with a combined turnover of around £11bn and 100,000 employees. So Arcadis has a way to go before it can match that.”

However, he added: “I would not be surprised to see some mergers among the ‘big but not giant’ firms, which is the cateogry I would put Arcadis in.

Hyder, with around 4,000 people is mid-sized, so you have to buy a lot of mid-sized firms if you want to get big fast. It is a pity to see another of these respected mid-sized firms being gobbled up, but I don’t think it will be the last.

“I think good-performing mid-sized companies can expect the phone to ring. I also expect that this will happen among bigger firms too.

“Now the economic future looks clearer, boards probably feel more confident than before about making acquisitions – and I am not surprised that mid-sized firms like Hyder are targets.

“These are certainly interesting times.”

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