Hughes Drilling (ASX: HDX) has reached a Heads of Agreement to acquire Western Australia drilling contractor JSW Australia for $7 million worth of shares and assuming JSW's existing external debt of $17.4 million.
Notably, the acquisition is expected to be EPS accretive in the 2015 financial year with significant synergies available in the 2014 financial year and beyond.
This reflects the JSW business as it currently stands with the majority of its 2014 financial year order book secured.
"The acquisition of JSW is considerably more than a profitable extension of our Queensland and New South Wales production drilling services," chairman Robert Hackett said.
"JSW provides Hughes with a platform to accelerate our strategic objective to extend our core blast hole drilling operations into the iron ore mines of north west WA (either as a contract driller or through our Reichdrill manufacturing operation as a supplier of rigs).
"Hughes' purchasing related cost advantages and success in securing work in iron ore blast hole services should progressively add to the value of the transaction to shareholders.
"In addition, the introduction of Jeff Branson (co-founder of Brandrill) and John Silverthorne (cofounder of NRW Holdings) to our Board brings significant Board and operational expertise to generate shareholder value."
JSW has three business divisions servicing clients in the Western Australian resources government instrumentalities and private sector markets.
These business divisions comprise grade control and resource definition, water drilling, production bores, dewatering bores, monitoring bores, geothermal bores, servicing and specialist (including BOP well control, paste & service holes and ROBIT casing advance) services inside the mine fence line.
Its acquisition provides Hughes with an established Western Australian specific RTO, HSE and Indigenous participation operating framework for the company to its blast hole operations, particularly in the iron ore sector.
It also expands the company's technical capabilities and service offering to clients in the Australian resources industry.
This is a neat acquisition by Hughes, with access for its core blast drill rigs into the iron ore mines of Western Australia either as a contract driller or through the Reichdrill manufacturing operation as a supplier of rigs.
Critically, it builds a national foot-print for Hughes as well as being EPS accretive in 2015 FY. On our estimates, Hughes continues to be undervalued by the market at current share price of $0.24.
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