It’s the most ambitious move yet in AECOM’s massive ongoing restructuring.

The giant Century City-based infrastructure and consulting contractor is planning to spin off its lucrative government contracting business, which generated $3.7 billion in revenue last year.

The spinoff was voted on by AECOM’s board and announced June 17. It’s slated to take place in the second half of 2020. The division last year reported operating income of $200 million.

The yet-to-be-named stand-alone company will have an estimated 25,000 employees — a significant slice of AECOM’s current staff of 87,000 worldwide.

In its announcement, AECOM didn’t say where the new company would be headquartered, and a representative for the company declined to specify the location.

However, the executive picked to run the new entity — John Vollmer, currently group president of the management services unit — is based in AECOM’s Germantown, Md., office, about 25 miles outside of Washington, D.C.

Roughly 90% of the government contracting unit’s work during the fiscal year ending in September was from contracts with federal government agencies. Overall, according to AECOM’s 2018 annual report, 23% of the company’s total $20 billion in revenue was from federal government contracts.

More information on the terms of the spinoff will likely become public when the company files its required registration statement with the Securities and Exchange Commission.

Moving to D.C.?

If the spinoff locates its headquarters in the Washington, D.C. metro area, it will mark the third time in recent years that a major government contracting company has moved from L.A. County to the Capital Region.

In 2010, Northrop Grumman Corp. relocated its headquarters from Century City to Falls Church, Va.; earlier this year, Parsons Corp. moved its headquarters from Pasadena to Centreville, Va.

In this instance, AECOM’s corporate headquarters will remain in Century City while the newly spun-off government services business might move to the D.C. area. Many of the personnel in the current unit are already based there.

Maximizing share value

In making the announcement, AECOM Chief Executive Michael Burke said the principal aim — indeed the aim of the entire restructuring process — is to increase shareholder value.

According to data from Bloomberg, AECOM’s three-year annualized shareholder return is about 5.8%, just above its peer group average of 4.6% but lagging substantially behind rival Jacobs Engineering Group Inc.’s 19.3% and KBR Inc.’s 25.3%.

“Today’s announcement marks a transformational step forward for AECOM and continues our pursuit of maximizing shareholder value by best positioning our industry-leading businesses for long-term success,” Burke said in the announcement.

In May, Burke told analysts in a conference call discussing quarterly earnings that the company would be exiting construction contracts where it bears­ financial risk for cost overruns or does the construction work itself. Burke described this as an effort to increase margins for construction work.

AECOM’s move to spin off its government contract work is unusual for the industry, according to Michael Dudas, an analyst with Vertical Research Partners in Stamford, Conn.

“There have been more acquisitions than spinoffs,” Dudas said in an email.

In AECOM’s case, he said, “Management wants to generate value for shareholders by allowing its government business to earn a higher valuation multiple than what the market accords current AECOM shares.”

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