There’s no guarantee that mergers will work out for the companies involved - we look at four of construction’s biggest deals
Last week’s news that Balfour Beatty and Carillion are in merger talks has rocked the construction world. If successful, the deal would create by far the UK’s biggest construction company, dwarfing its nearest rival Laing O’Rourke by an order of more than four to one by turnover.
The news reflects a wider rebound in merger and acquisition activity. Global M&A values were $1.75tn in the first half of this year, the highest level recorded since 2007. The total value of these tie-ups is 44% greater than for the same period last year. In the UK meanwhile, the second quarter of 2014 saw £27bn worth of deals, the highest quarterly value recorded since the second quarter of 2012 and a 156.5% increase compared to the first three months of this year. Construction has been getting in on the act with the announcement earlier this month that Galliford Try has bought Miller’s construction business.
However, M&A deals have a chequered track record in the construction industry. It is easy to see why a chief executive will opt for a game-changing acquisition rather than slow burn organic growth. But while it is relatively easy to bolt one housebuilder onto another, as much of the value is locked up in land banks, contractors’ and consultants’ assets tend to be a bit more nebulous. All M&A activity is open to the accusation that merged entities are less than the sum of their parts, an analysis that has particular bite in the construction sector.
So, with that in mind, Building has been looking in the vaults to examine how four of the sector’s biggest deals of the last decade have fared.
BALFOUR BEATTY-PARSONS BRINCKERHOFF
- COMBINED TURNOVER PRE-MERGER*: £8.9bn (2008)
- COMBINED OPERATING PROFIT PRE-DEAL: £222m (2008)
- PRICE OF THE DEAL: £380m
- COMBINED TURNOVER POST-MERGER*: £10.3bn (2010)
- OPERATING PROFIT POST-DEAL: £207m (2010)
It’s hard to recall now but not so long ago, Balfour Beatty could do very little wrong. It was during those heady days in 2009, soon after the company had become the first contractor to enter the FTSE 100 in 15 years, that it announced the acquisition of US consulting engineer Parsons Brinckerhoff. The acquisition entrenched the company’s pole position among UK contractors, while its declared strategy to diversify into a global construction and professional services company made sense to analysts. Balfour’s decision to keep Parsons Brinckerhoff as a distinct brand within the enlarged group meant that cost savings were not the key driver behind this acquisition. Balfour said that it would save a relatively paltry $8m a year in costs. Instead Balfour said it wanted to be able to offer a broader range of services and a stronger presence in the US, which it would have been hard pressed to build itself. Amid Balfour’s recent woes, Parsons has continued to perform well, which meant there were raised eyebrows when the US subsidiary’s sale was announced recently. However, Alastair Stewart, construction analyst at Progressive Research, argues that Parsons’ limited integration into the group means Balfour Beatty has never reaped the full benefits of its acquisition. One plus point with this though: it will be easier to sell Parsons.
The analyst’s view: Tony Williams
Balfour Beatty (BB) bought Parsons Brinckerhoff (PB), in 2009 for £380m. Since then, PB has done well whilst BB has not (including a number of profit warnings and two changes of CEO). BB may now have to sell one of its crown jewels; an optimist might say, good job that it owns one.
GEORGE WIMPEY-TAYLOR WOODROW
- COMBINED TURNOVER PRE-MERGER*: £6.6bn (2006)
- COMBINED OPERATING PROFIT PRE-DEAL: £887m (2006)
- PRICE OF THE DEAL: £5bn
- COMBINED TURNOVER POST-MERGER*: £6.8bn (2007)
- OPERATING PROFIT POST-DEAL: £823m (2007)
The housebuilding sector was already in a fever following Barratt’s takeover of Wilson Bowden when George Wimpey and Taylor Woodrow announced plans in March 2007 to create the UK’s largest housebuilder. But the mega deal quickly turned sour as the newly merged company was forced to announce a £61m hit as a result of the crash in the US housing market, to which Wimpey and Taywood had both been heavily exposed. Things got worse during the following year as Taywimp’s share price plunged to just 4p. The company was only saved from collapse after it secured a £1.5bn refinancing deal from its banks. However, “like two drunks propping up one another”, the merger, says Tony Williams of Building Value, helped one or both companies from being rubbed out during the depths of the recession. The relatively straightforward nature of housebuilding mergers delivered “efficiencies” in the form of 700 job losses and the closure of four offices, including Taywood’s Solihull headquarters. And now, on the back of the wider housing market revival, Taywimp has returned to financial health. However, the combined entity is still building fewer homes than its parent companies were producing in the mid-2000s, suggesting that mergers in this sector have a wider social cost. “It could be suggested that it reduces competition in the market place,” says Stewart.
The analyst’s view: Kevin Cammack
Value for money? A big no, I’m afraid, but when you’re doing even a nil-premium £5bn merger off a highly geared balance sheet in a highly cyclical industry barely months before the top of the market in 2007, it’s the timing that kills you, not the concept or the integration or operational ability. Before a year was out the housing market had crashed and the TW share price had sunk below 10p (option money on its survival) from a post-merger high of 385p. A rescue rights issue (raising £510m) and £595m sale of its combined US housing businesses later, TW was able to stagger through to recovery. Since then, to be fair, under the blossoming stewardship of Pete Redfern, TW has more than held its own; profits this year are destined to surpass those of the last peak and its net return on invested capital (ROIC) will match or exceed the pro-forma level of 2007. Moreover it is now planning to start returning cash to shareholders. So managerially and operationally a success, I think, but value for money/shareholder value creation? Well, there but for the grace of God and the banks…
CARILLION- ALFRED MCALPINE
- COMBINED TURNOVER PRE-MERGER*: £4.7bn (2007)
- COMBINED OPERATING PROFIT PRE-DEAL: £43m (2007)
- PRICE OF THE DEAL: £572m
- COMBINED TURNOVER POST-MERGER*: £5.2bn (2009)
- OPERATING PROFIT POST-DEAL: £63m (2009)
Carillion showed that it meant business about expansion in 2007. After its overtures to the Alfred McAlpine board were rebuffed, it launched the sector’s first hostile takeover bid in years for its rival. At the time, analysts were sniffy about the deal, a scepticism grounded in the larger company’s troubled takeover of Mowlem. Despite the exodus of a string of senior staff, McAlpine proved easier to swallow, with savings exceeding the original estimates presented to shareholders. Carillion’s cost savings reached £40m a year by the end of 2009, £10m more than anticipated. Building rated the Carillion/Alfred McAlpine tie-up as one of the five most successful deals of the noughties in its end-of-decade review, commenting that “it looks to have been a shrewd move - it has given Carillion a strong presence in support services and civils”.
The analyst’s view: Kevin Cammack
While I would describe Carillion’s purchases of Mowlem and EAGA as miserable from a shareholder return perspective, I would rate the McAlpine buy as “not unsuccessful”, if that makes sense. The jewel in the crown was definitely Stiell which afforded a strong presence in FM /business services (financial sector) ahead of maybe the utilities maintenance business while Carillion was certainly able to extract full cost synergies (over £40m in the end) after its experiences with Mowlem. However, for £572m it is debatable whether this was a value for money transaction on a ROIC basis especially as by 2010 it was downsizing the group’s core construction business.
- PRICE OF THE DEAL: £278m
The 2012 tie-up between WSP and Canadian engineer Genivar reflected the change in the terms of trade between Canada and its former colonial master. While Genivar was less than two-thirds the size of WSP in terms of staff numbers and turnover, the Canadian company had a market value of £516m - more than three times that of WSP’s £166m at the time. WSP chairman Chris Cole was candid that it made sense to tie his firm to what he described as the “powerhouse” Canadian economy - one of the few bright spots in the largely depressed developed world at the time. And this is a rare takeover that feels like a meeting of equals. WSP’s wider global presence means that the combined firm, while headquartered in Canada, has taken the UK company’s brand and Cole remains chairman of the combined company. Earlier this year, WSP acquired 50-strong Australian commercial tower work specialist engineer, Winward, helping to fulfil Coles’ stated commitment at the time of takeover to boost the company’s footprint in the Asia- Pacific region.
The analyst’s view: Tony Williams
Genivar, a Canadian company that no one had ever heard of, agreed to buy WSP at a knock-down price in June 2012 (435 pence/£278m). It then changed its name to that of the target and since the deal closed (01/08/12), the share price of the new WSP (aka Genivar) has risen 70%.
* Turnover figures taken from Building’s Top 150 Contractors and Housebuilders leagues (year in brackets).
** Combined turnover and profit figures not given because available financial information of the companies is not directly comparable.