Questions raised as Ferrovial pulls out of $830m Transfield deal

Spanish construction group Ferrovial has pulled out of takeover talks with Australian infrastructure operator Transfield Services after Transfield rejected its offer of A$2 a share. 

Among its portfolio of contracts, Transfield runs the Manus Island asylum detention centre, pictured, in Papua New Guinea. 

The bid was Ferrovial’s second. It first approached Transfield in October with an offer of A$1.95, which the company’s board said did not reflect the underlying value of the company.   

Two months of talks followed, after which Ferrovial raised its bid to A$2, valuing the company at US$830m. When Transfield rejected that bid too, Ferrovial announced that it was no longer interested in reaching a deal. 

In a statement, Transfield repeated the line it took in October, saying the offer did not reflect the "underlying value" of its shares.  

The stress on underlying value reflects the fact that the firm’s shares were trading well below the initial A$1.95 offer, which reflected the slump in oil prices and the end of the country’s mining boom.  

Ferrovial’s decision to pull out has raised concerns among Transfield’s investors as to what may have been uncovered in the due diligence process. One institutional investor told The Sydney Morning Herald: "We are keen to clarify what Ferrovial found after looking under the bonnet."  

One concern is the reliance of Transfield’s balance sheet on two large asylum centre contracts with the Department of Immigration, both of which are up for renewal in October next year. 

Shares in Transfield slumped almost 18% to below A$1.50 following the announcement today, before ending at A$1.70.  

Simon Mawhinney, investment manager at stockbroker Allan Gray, told The Sydney Morning Herald that the Transfield board had taken a risk by failing to put Ferrovial’s offer to shareholders. 

"If it turns out in 18 months’ time that A$2 a share was good value then they need to be held accountable," he said. "On the other hand if the share price is higher then they should be rewarded." 

Mawhinney added that Allen Gray valued the Transfield shares at A$2.50. 

Transfield is one of the biggest outsourcing companies in Australia, with subsidiary operations in New Zealand and the Americas.  

Before winning the US$1bn contract to run the detention facilities on Manus Island in Papua New Guinea and the island of Nauru in Micronesia, Transfield made a loss of $238m. 

Australia is planning a US$40bn state spending programme to build roads, railways and ports over six years. 

Ferrovial chief executive Iñigo Meirás said in October that Australia was a stepping stone on the way to China and the other Asia Pacific markets.  

Ironically, China arrived in Australia first, with China Communications Construction Company’s purchase of  contractor John Holland from Leighton Holdings for US$940m.