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AusGroup’s Buying Ezion Holdings’ Subsidiaries: Is It A Smart Move For Both Companies?

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Yesterday, AusGroup (SGX: 5GJ) made an announcement that might surprise some: It has proposed an acquisition of Ezion Offshore Logistic Hub Pte. Ltd and 90% of Teras Australia Pty. Ltd. Both are subsidiaries of Ezion Holdings (SGX: 5ME).

AusGroup at present

AusGroup currently has three main business segments. The first is housed under its subsidiary AGC, which provides services such as fabrication, construction, and facility maintenance to industries like Oil & Gas and Mining & Minerals.

The second segment deals with the provision of services to the Marine and Offshore drilling industries and the business activities there are carried out under another of AusGroup’s subsidiaries, AusGroup Singapore. The last segment, represented by the subsidiary MAS, provides scaffolding and related services.

Changes to AusGroup

With yesterday’s announcement, AusGroup would potentially be diving into the port and marine logistics business through its purchase of Ezion Offshore Logistics Hub. It will also gain a ship chartering service provider with its 90% interest in Teras Australia.

As though buying up entirely new lines of businesses isn’t interesting enough, the terms of the deal itself are intriguing. AusGroup would be financing the proposed S$55 million deal with S$14 million in cash and S$41 million in shares. If the deal goes through, Ezion Holdings will actually end up owning 17.83% of AusGroup, making the former the largest shareholder of the latter.

Ezion Holdings will also be given two board seats on AusGroup’s Board of Directors. From AusGroup’s 2013 annual report, it’s clear that the company has no substantial shareholder – i.e., none of its shareholders own more than 5% of the company. With representation on the board coupled with it being the largest shareholder, Ezion Holdings could effectively become the main arbiter of AusGroup’s corporate future.

Thus in a sense, Ezion Holdings is actually injecting a segment of its business into AusGroup (as opposed to selling a part of its business) in a possible attempt to gain an important influence on a company with diversified services which Ezion Holdings currently do not possess.

Foolish Summary

Ezion Holdings might be the one gaining an upper hand in this deal. It would be able to diversify into many other services as well as strengthen its foothold in the Australian market. Although some parts of its businesses will now be under AusGroup, it will still have huge influence over how their futures unfold.

That’s not to say however that AusGroup wouldn’t benefit, despite the concern with potential dilution of the company’s existing shareholders. AusGroup would be issuing 92.16 million shares for the deal if it goes through successfully; for perspective, the company has about 578 million shares outstanding currently.

For AusGroup, there are clear cost synergies that can be achieved between itself and Ezion Holdings’ subsidiaries; both companies can also share cost centres and their networks in Australia in order to build a more efficient business model; AusGroup would also be able to provide a more complete set of services for its clients in the Oil & Gas industry.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore contributor Stanley Lim doesn't own shares in any company mentioned.