AusGroupAGC - An AusGroup Company

AusGroup provides a range of fabrication & manufacturing, construction and integrated services to natural resource development companies.

Reply to SGX Regarding the Acquisition of Modern Access Services

Dear Sirs

The board of directors of AusGroup Limited (the 'Company') refers to the query from the Singapore Exchange Securities Trading Limited regarding the acquisition of Modern Access Services ('MAS'). The query was as follows;

“We note that Modern Access has incurred a loss before tax of AUD1.0 million for its financial year ended 30 June 2008. In comparison, we note that Ausgroup reported profit before tax of AUD19.6 million for the comparative period (giving a relative figure of about -5%) and profit before tax of AUD6.2 million for the most recently ended quarter.

In light of the loss-making nature of Modern Access and the relative significance of its losses to Ausgroup's income, please explain the specific factors taken into account in arriving at the exact consideration amount.”

In assessing the acquisition opportunity and the acquisition price payable many factors were taken into account;

Strategic fit with existing business lines

The strategic fit with the existing AGL business lines is compelling and the Company can now offer a more integrated and streamlined service offering to its customer base which has the potential to enhance profitability and revenues. The expansion of the Company’s geographical footprint will also allow the existing AGL group to leverage off new customers in new locations in Asia.

Management team with proven track record

The management team has a proven track record in this industry sector and the order book which Modern Access has won in its short history is evidence of their reputation in the market place.

Losses relating to FY ended 30 June 2008
The losses incurred in the financial year to 30 June 2008 were primarily as a result of the operating structures being established in anticipation of future contract awards.

Earnings potential

The purchase price was negotiated based on AGC’s assessment of future cash flows, taking into account awarded contracts and likely future contracts. The Earn out arrangement takes into account the uncertainty of some of the assumptions made in respect of future contracts in our acquisition modeling. Quantitative factors The company determined the AUD$15 million initial consideration on a number of quantitative factors including; Net assets being acquired of AUD3.3 million, Based on MAS current order book and likely orders, whether the estimated internal rate of return was in excess of our required minimum internal rate of return and Whether the payback of the initial investment was within the Company’s required time frame.

Yours faithfully

John B F Sheridan
Managing director/CEO