Consolidation is the name of the game

A giant game of corporate musical chairs was unfolding across the UK and Europe over the festive season involving, among others, Costain’s bid for Mouchel, and Spanish giant ACS closing in on Germany’s Hochtief. The music hasn’t stopped yet in the industry’s latest bout of attempted consolidation, but when it does there could be fewer - but bigger - players left.

The latest flurry involves a variety of motives: going up the “value chain” to clients and down toward users; bulking up core strengths; or broadening geographic reach.

Costain went public on its approach for the consultancy and infrastructure maintenance group just before Christmas. It has now made two (rejected) bids for Mouchel and there are predictions it will soon make a third.

The move is the latest in a convoluted saga for Mouchel. A year ago it fended off a 250p per share approach by shipbuilder-turned-outsourcer VT. This was raised to 294p but was withdrawn when Babcock International bid successfully for VT. Mouchel, with net debt standing most recently at £83m, subsequently warned that full-year profits.

Costain argues that the proposed merger fits with its 2009 strategy “Choosing Costain”, in which consultancy and support services would take up more of the output of the group, seen once as primarily a contractor.

A similarly uninvited approach, albeit on a larger and international scale, was meanwhile under way between ACS and Hochtief, which operates several PFI projects in the UK. ACS, which oversees a complex empire of stakes in energy and other industrial sectors, had previously snapped up a near 30% stake in the German group. Hochtief viewed ACS as a co-operative - and static - shareholder.

But, to paraphrase Monty Python, nobody in the Essen headquarters expected the Spanish imposition. In September it announced a “low ball”, all-share offer. Strangely, to those versed in UK takeover procedures, the share formula valued the German group slightly lower than its €5bn market cap. But under German rules all ACS needs is to reach the 30% threshold to allow it to start buying shares unrestricted. ACS says it wants to take its holding to just over 50% - rather than going for 100%. ACS’ rationale is that this will make it more internationally balanced, with major operations in the US and Australia. Another, perhaps more credible reality is that, under accounting alchemy, a single share majority would allow the heavily indebted Spaniards to reduce gearing.

Could Balfour be flexing its financial muscles for further deals? In November it reversed a stance that had seen it holding on to - rather than selling - its increasingly valuable PFI equity portfolio

Hochtief’s attempts to fend off its suitor included issuing 10% more shares and selling them to Qatar Holding, thus diluting ACS’ stake. Despite, and possibly because of, these manoeuvres, American activist investors (sweetened by a slightly raised number of ACS shares for Hochtief ones) said they were prepared to switch sides, taking ACS’ stake perilously close to 30% as the mid-January takeover panel deadline loomed.

Whatever happens in these ongoing situations, it appears likely a major bout of consolidation is under way.

Hochtief’s domestic rival Bilfinger Berger sold its Australian construction subsidiary to Lend Lease. The €500m (£430m) net proceeds will be reinvested in the further expansion of Bilfinger’s support services activities, which have grown largely by acquisition.

Britain’s biggest construction group, Balfour Beatty, however, has stayed quiet on the corporate side since it bought Parsons Brinckerhoff in 2009, which fulfilled its twin aims of going up the value chain by increasing its consultancy clout and expanding its US presence.

But could Balfour be flexing its financial muscles for further deals? In November it reversed a stance that had seen it holding on to - rather than selling - its increasingly valuable PFI equity portfolio. It said it would sell up to £300m over the next five years. This extra financial flexibility will do no harm to its £500m-plus potential war chest. The group has made little secret of its wish to make “in-fill” acquisitions. California is one area where its contracting operations are sub-scale. In Britain, fit-out is under-represented.

Balfour has been an active consolidator in the UK middle ground, buying good, but under-financed companies, that offer either regional strengths or specialist skills.

Carillion, too, has been selling PFI stakes and reducing debt. With Mowlem and McAlpine now subsumed, one might assume it may be searching out new targets.

With major clients steering more and more work to a shrinking band of framework suppliers, and a growing list of casualties joining the ranks of Connaught and Rok, the round of musical chairs looks set to continue.

Alastair Stewart is a construction and housebuilding analyst