This contractor’s acquisition of Parsons Brinckerhoff will be prompting its rivals to ask whether expansion might be a far-sighted strategy in tough times
Balfour Beatty has completed its $626m (£375m) acquisition of Parsons Brinckerhoff, which achieved two strategic objectives: to establish a significant position in construction professional services and to complete the creation of a full service construction business in the US, akin to its position in the UK.
The culmination of its American (and, increasingly, global) objectives has thrown the gauntlet down to its UK peers, who must, at the very least, be contemplating why, if and how they can begin to replicate this expansion.
In five years – effectively the tenure of Ian Tyler’s leadership – Balfour has set itself apart from its narrow UK-centric peer group and shouldering up to the pan-European players such as Vinci and Skanska in terms of revenues, service offering and global reach. In so doing has Balfour created the role model for the 21st-century contractor? Or has it turned itself into an expensively assembled, unmanageable beast?
It has spent a staggering $1.6bn gross since 2007 establishing a fully fledged US business. Parsons Brinckerhoff has given it a professional services earnings stream alongside its core construction services and PPP investments, and the result is a firm that is able to compete on an increasingly global basis. Assuming investors can live with bouts of moderate earnings dilution consequent to the new equity and management risk that is inherent with scale increase, then the business model Balfour has created is structurally an appealing one.
Relative to UK peers it has successfully managed to de-risk the business, and broaden its profit base by activity and geography while retaining financial security.
Balfour has long eyed the professional services side of construction and has attempted to build this expertise in the UK without huge success. That is why is has ultimately turned to the US for expertise.
From the uk’s ivory towers, rival contractors must eye balfour’s achievements and ask themselves if they wish to emulate them
By professional services I mean the programme management of large, complex projects from planning, design, engineering, project and construction management to operations and maintenance. This requires scale and global reach. The contrast is with construction services, which can thrive more on a national or even regional basis.
At a stroke, Parsons Brinckerhoff increases Balfour’s exposure to professional services from 5% to 23% in terms of group “value” and dilutes construction services from 60% to 49% and investments/PPP from 35% to 28%. Moreover, these revenues tend to be longer in duration and higher quality in terms of margin, size and status. This is reflected in a the geographical split, with UK revenues now 58%, the Americas 32% and Australia/Asia/other 10%.
By profit the non-UK element rises to nearer 40%. Professional services also gives Balfour potential to expand organically in a relatively de-risked manner; for example, entering new markets though professional services is considerably less risky in both operational and financial terms than through construction services.
From the UK’s ivory towers, rival contractors must eye Balfour’s achievements and ask themselves if they wish to emulate them. Do they want to:
- Increase geographic spread at a time when the UK industry could be facing a prolonged downturn accentuated by public sector spending cuts?
- Do they want to diversify their activity and the ability to offer major clients a full suite of construction services on an almost global basis, together with the opportunity to cross-sell services to existing clients?
- Do they want to use professional services expertise to introduce higher margin (4-5%), longer-term revenue streams?
- Do they want to underpin long-term cash flows through what are essentially “cost-plus” professional service revenues?
- Do they want the perception at least of higher-quality earnings, valuable in the eyes of investors and, more importantly, lenders?
There are counter arguments and I would cite some obvious ones such as:
- Do the different cultures inherent in professional services and construction services sit easily under one roof? Several have tried but the jury is still out.
- Is it an intolerable stretch of existing management resource which counters the “macro” de-risking argument?
- It arguably requires acquisitions that are expensive, reflecting the premium payable to often already more highly rated businesses.
- There are normally few initial integration or synergy benefits since expansion of this nature tends to be supplementary.
- Acquiring or developing overseas businesses often compels the acquirer to run large cash balances to meet regulatory or insurance requirements. This can effectively lock up a cash position to the extent of making it structurally “valueless”. However, the fact is that such goals of diversification are near unattainable for many because of the sheer cost and “fundability” of expansion.
That said, standing still is simply not an option – the next wave of consolidation will probably cause recession-hit UK contractors of all sizes to go to the wall or be swallowed up by an increasingly expansionist group of large pan-European, if not global, players.
Kevin Cammack is an analyst at Cenkos Securities