AECOM – No news on M&A, but now earnings?

By Stewart Turner

stewart@stewartturner.com

Introduction

After the close on Monday, January 13, Bloomberg reported that WSP Global, a Canadian company was interested in buying AECOM.  The stock popped 5.65% on the news on Tuesday, but there has been little in the way of follow-up news, including no comment by WSP Group CEO Alexandre L’Heureux. 

Will there be a deal?  If so, at what price?

My readers know that my background is in options trading and that I primarily look at them to foretell M&A activity.

With earnings scheduled to be released on Monday, February 3, what should a trader be ready to do?

Background

Like most stocks, AECOM (ACM) had a very strong year in 2019.  It performed better than most with the stock price climbing by almost 63% and is hard to consider as a cheap stock, especially with gains in 2020.

AECOM is a construction and engineering stock.  According to its profile used in press releases, “AECOM (ACM) is the world’s premier infrastructure firm, delivering professional services across the project lifecycle – from planning, design and engineering to consulting and construction management. We partner with our clients in the public and private sectors to solve their most complex challenges and build legacies for generations to come. On projects spanning transportation, buildings, water, governments, energy and the environment, our teams are driven by a common purpose to deliver a better world.”

The first few days of 2020 were quiet both for AECOM stock and its publicly traded options.

The week of January 6

On Wednesday, January 8, 2020, 5538 AECOM calls traded.  This was the second busiest day for ACM calls in at least eight years.  With the stock climbing just 1.46%, over 4000 January 45 calls and over 1000 February 47.5 calls traded and volatility increased from 23.4% to 27.6%!  It looked like something was up with ACM!

The following day, another 7295 calls traded.  Thus, two out of the three most active days for call trading in eight years occurred in just a two-day period! 

Not only was January 9, at least an eight-year record for call volume in ACM, but implied volatility increased again, from 27.6% to 30.4%.

If you hadn’t considered the possibility of something being up in ACM on Wednesday, with two days of record volume in the calls and IV spiking by almost 30% (from 23.4% to 30.4%), you had to have considered it on Thursday, especially with the stock jumping almost 5% from $43.73 to $45.86!

The week of January 13

After the close on Monday, January 13, Bloomberg had this headline in all capital letters (“WSP IS SAID TO APPROACH RIVAL ENGINEERING FIRM AECOM ABOUT DEAL”) but did not provide any details.  Unsurprisingly, the stock price was higher in after-hours trading and Tuesday’s closing price of $49.74 was 5.65% higher than the Monday closing price, before the headline.  9452 calls traded on Tuesday, another record for the past 8 years.  This was not surprising given the news from Bloomberg.

What was surprising was that most of the activity was in the same $45 and $47.50 strike prices from the week before and not the strike prices of $50, $52.50 and $55.  Not only this, but open interest in the calls that traded heavily the prior week declined.  This most likely means that the “smart money” sold on the announcement of possible M&A activity (and not actual activity).

Combining the quick rise based on the M&A activity headline within days after the calls were purchased, the smart choice of strike prices by the buyers, and the decrease in open interest after the headline, was this just a game, where the initial buyers were able to take profits leaving the post-announcement buyers with possible losses?  A rumored transaction does not always have to occur for option buyers to make profits.  (Traders should review the Juniper Networks trading of November 2018 where large call buying was followed up with a rumor of Nokia buying Juniper; in after-hours trading on November 29, 2018, JNPR popped slightly more than 20% before falling back when the proposed tie-up was denied.  Quick traders likely did very well with this rumored story.)

On January 16, Bloomberg Editorial reporter Michael Bellusci tried following up with WSP Global CEO Alexandre L’Heureux about the Bloomberg report from three days earlier but L’Heureux declined.  According to the article, L’Heureux said “On a ‘regular and consistent basis,’ WSP has had ‘many formal and informal discussions with pretty much everybody in the industry,’ adding that ‘it’s not a big industry’” and added “It’s ‘fair to say that I do have discussions with most of my counterparts’”.

There has not been much news since then.

Comments from the sell-side Fundamental Analysts in response to the Bloomberg headline

Several analysts made comments the day after the Bloomberg headline; all of them were fairly similar.  Deutsche Bank analyst Chad Dillard commented on $200 million in cost synergies and wrote that a deal could be between $54 and $59.  Baird analyst Andrew Wittman thought the deal price would be in the mid- to upper-50s.

Adam Seiden of Barclays wrote that $50 leaves too much on the table and saw an upside valuation of $60.

My favorite line in Mr. Seiden’s report was “If the article (author: referring to the Bloomberg headline) proves to be accurate, a prospective sale makes industrial sense for the company and provides some closure to long-term holding shareholders.  It could all make just too much sense though.”

Recommendation

Given the lack of follow-up news regarding a transaction with WSP Group and the limited amount of trading in out-of-the-money calls in AECOM during the past few weeks, I am inclined to agree with what I take to be Mr. Seiden’s skepticism in that line.  However, with earnings due out on Monday, February 3, I fear WSP’s CEO L’Heureux may just have been coy and with Friday’s close of $48.23, a takeover bid can potentially have 20% upside.

Many times, M&A activity is announced in conjunction with earnings (significantly more than the random 1-in-63 chance given four quarterly announcements in a typical trading year consisting of 252 trading days).  The most striking example I can recall is the case of Supervalu.  When Supervalu was listed (with ticker SVU) in July 2018, there was a huge earnings miss (approximately -$0.18 vs. an expected $0.30, but SVU stock price rallied 65% on the news of a takeover bid by United Natural Foods Inc. (UNFI) at a 67% premium (UNFI).

If Monday’s earnings announcement comes without any M&A activity, I recommend selling AECOM.