In the Spotlight
Dynamic growth: Strategic acquisitions fuel profitability at HOCHTIEF
HOCHTIEF follows the clear goals of and systematically seizing market opportunities and further boosting profitability. A number of acquisitions in the third quarter of 2007 underscore this resolve. The new acquisitions include Flatiron Construction, USA, and 50 percent of aurelis Real Estate, Germany. Both of these accord with the HOCHTIEF strategy of selective expansion. They meet our strict investment criteria and will contribute positively to consolidated net profit from 2009 at the latest. Flatiron will already have a positive impact on cash flow in 2008. The purchases are part of our successful drive to grow in promising, highly profitable business segments.
On September 5, 2007, our real-estate development arm HOCHTIEF Projektentwicklung and its consortium partner Redwood Grove International bought aurelis Real Estate GmbH & Co. KG, a real estate subsidiary of the German rail company, Deutsche Bahn AG.* The two partners each hold 50 percent of aurelis. The purchase price amounts to EUR 1.64 billion, of which HOCHTIEF accounts for approximately EUR 820 million. We are contributing just under EUR 206 million of our own capital resources.
aurelis generates value by managing, developing and selling non-operating real estate assets formerly used by Deutsche Bahn. Its holdings include 1,495 properties with a combined area of some 27 million square meters, many of them on prime German inner-city sites, for example, in Berlin, Frankfurt and Munich. The new acquisition's rental portfolio includes modern office buildings, warehouses and open spaces. The company boasts an approximately 130- strong workforce and already generates steady rental income of some EUR 105 million a year. Based on the purchase price, the gross yield currently stands at 6.4 percent. The size and attractiveness of the portfolio also open up superb prospects for development. HOCHTIEF Projektentwicklung has successfully developed and sold properties worth some EUR 2.7 billion in the last five years alone. We will use the resulting development expertise and our experience in managing real estate to establish aurelis as Germany's No. 1 integrated asset manager and inner city district developer.
This acquisition once again highlights our strategy of integrating HOCHTIEF capabilities: We offer design, development, construction, asset management and property management from a single source, leveraging potential added value for our clients and the HOCHTIEF Group.
A further qualitative boost to Group earnings is secured with the acquisition of US civil engineers Flatiron Construction Corp., Longmont, for which we signed a share purchase agreement on September 25, 2007. Financial close is expected in the fourth quarter. The purchase price comes to EUR 173 million, and interest of USD 1 million a month is payable from July 1, 2007 until financial close. With a workforce of just under 1,700, Flatiron generated over EUR 496 million in sales in 2006.
Flatiron ranks among the top ten vendors in the transportation segment in the USA. In purchasing this highly reputed, well positioned company, HOCHTIEF directly gains an outstanding position in the growing US civil engineering market, extending its existing capability portfolio in North America via our subsidiary Turner, we have already been No. 1 general builder in the US for some years.
Purchasing Flatiron enables us to profit from the infrastructure boom in the USA, the world's largest construction market. It is estimated that state expenditure on expressway and bridge building projects will total nearly USD 55 billion in 2007 alone. Major demand for upgrading and new infrastructure will maintain expenditure at a similarly high level for the next few years: According to estimates, around USD 1 trillion will have to be spent by 2015 on bringing roads, bridges and tunnels into line with growth in traffic volume. Substantial investment in transportation infrastructure is also planned in western Canada.
A national public-private partnership (PPP) market is also now evolving in the USA and Canada. Flatiron delivers civil engineering services for PPP projects in western Canada and so has already gained experience in this segment. A number of large toll road projects are to be put out to competitive bidding in the USA and Canada in the next 24 months. This presents HOCHTIEF with an opportunity to integrate and combine its existing civil engineering capabilities and its international PPP expertise with Flatiron as an experienced provider on the North American market.
These acquisitions once again demonstrate HOCHTIEF's commitment to selective expansion in attractive business segments. This will remain our benchmark for future acquisitions.