Fletcher Building is making a belated push into the infrastructure sector by using funds raised from the sale of quarry assets to help finance an expansion into road construction and maintenance in New Zealand and the Pacific islands.

Fletcher will buy the privately held Higgins Group for $NZ315 million. The purchase follows 25-years of working jointly with Higgins, which is based in New Zealand’s lower North Island. Higgins has expanded to Auckland to the north, as well as to Canterbury on the South Island and to Fiji.

The purchase recycles $194 million raised with the sale of Rocla quarry products assets, mostly to Hanson Construction Materials, which received government approval late last week.

The assets being acquired include quarries, asphalt and bitumen plants but excludes Higgins’ ready-mixed concrete and property assets.

Higgins has annual revenue of $NZ391 million ($288 million) with underlying earnings before income tax of $NZ35 million in the 2015 financial year, which is expected to rise to $NZ40 million this year.

Higgins generates a quarter of its earnings from road maintenance and the balance from capital works. Of the revenue of $NZ491 million, contracting revenues in NZ generates $NZ313 million, with contracting in NZ generating $NZ55 million and aggregates a further $NZ23 million.

“A small deal, but strategically it’s a good one for Fletcher Building given its complementary nature, vertical integration benefits and growth potential,” Forsyth Barr analyst Andrew Bowley said. “Fletcher is under-represented in the NZ infrastructure market, which this deal helps to fill. The deal price is not cheap, with value benefits reliant on growing the acquired assets.”

Fletcher Building is paying 7.9 times the forecast 2016 earnings before income tax of Higgins, with no growth opportunities factored into the valuation.

The opportunities in the road construction and maintenance have been on its radar for some time, Fletcher Building said, and it first started talking with the Higgins family two years ago.

“This is the first major acquisition by Fletcher Building in five or six years and is the latest development in our portfolio management process which has also seen us exit the Pacific Steel business in New Zealand and the Rocla quarries business in Australia,” Fletcher Building chief executive Mark Adamson said. “This transaction will help us to pursue growth opportunities in the roading sector in New Zealand, Fiji and other South Pacific territories.

Higgins is the third ranked player in the space in NZ, behind Downer and Fulton Hogan.

RBC analyst Andrew Scott said the purchase fills a gap in the Fletcher Building offering and will add 3 per cent to earnings even if fully debt funded.

“With the proceeds from Rocla Quarries ($NZ212 million) and $NZ725 million funding headroom, Fletcher Building has plenty of balance sheet flexibility to fund the acquisition,” he told clients of the purchase.

“Fletcher’s internal estimates include only $NZ2 million of synergies. We believe that the opportunities from a combination of the two businesses are likely to be meaningful and see upside to this figure.

“While direct overlap with Fletcher Building’s business is low, the operations remain close to Fletcher Business’s core and the level of understanding is high. This coupled with a two-year gestation period for this transaction suggests that the acquisition/integration risks should be relatively limited.”

Scott said RBC views the purchase “as a positive from both a strategic and valuation perspective”.