Ferrovial, Spain's most aggressive construction company, has shocked the UK industry by revealing its intentions of buying British airport operating giant BAA. But is it really that much of a surprise, asks Mark Leftly - and can the matador win its fight?
There's a lot of cash waiting to be spent at Ferrovial, the Spanish construction giant. And it seems intent on investing that money in the UK. From the headlines and reports surrounding last week's announcement that it wants to buy BAA, the largest airport operator in Europe and one of UK construction's most important clients, it would be easy to conclude that the move is something of a shock. Upon reflection, however, Ferrovial's thinking has been clear for some time: its interest in the UK market was demonstrated by the acquisition of support services outfit Amey for £81m in 2003 and it has been avidly pursuing airport deals over the past few years.
This is a vital deal for Ferrovial. It is desperate to be seen as the major player in the markets in which it operates and takes great pride that last year's £440m purchase of Swissport made it the world's number one cargo handler. If successful, the BAA deal will make Ferrovial the world's largest airport operator, emerging from the shadows of its rivals, such as sometime bidding partner Macquarie, an Australian investment bank. The consequences for contractors are clear - it would give Ferrovial a stranglehold on a vast forward order book over the next 10 years, including £6.8bn of investment in Heathrow, Gatwick and Stansted, and could lead the Spanish contractor to bring in its own people, renegotiating existing contracts or altering construction programmes.
Friends and rivals
Ferrovial's interest in UK airports started in late 2000, when it bought Bristol for £234m. The acquisition was made through a joint venture with Macquarie. Since then, there has been a strong bond between the two firms: the following year the Australian group bought a 40% stake in Ferrovial's toll roads business, Cintra, and together they have bid on a series of airports, including last year's aborted attempt to acquire Exeter International.
As a result, it has been speculated that Ferrovial could look to form a partnership with Macquarie for the BAA deal. It is believed that a minimum £8bn deal is too much for a company of Ferrovial's size - its market capitalisation is barely £6bn - so it will need to be part of a consortium. Thomas Pinto, an analyst at Spanish firm Kepler Equities, says: "Ferrovial does not have a problem with financing. Banks want to fund it and Ferrovial wants a strong airport division. But I think they will look to be in a consortium of more than two."
However, Macquarie has publicly stated that it has not been approached by Ferrovial.
There are three reasons why this is not a huge shock, the last of which is arguably central to Ferrovial's strategy. First, the duo's last attempt to work together turned out disastrously, when they pulled out of negotiations for Exeter. They dropped their bid as they felt the Competition Commission was taking too long to assess whether the purchase would be anti-competitive - coupled with their joint ownership of Bristol, it was argued that Exeter would give Macquarie and Ferrovial control of the South-west.
Second, Spanish sources believe Ferrovial is still smarting over its battle with Macquarie for Brussels airport in late 2004. It is understood that Ferrovial was on the verge of buying a 70% stake in the Brussels International Airport Company, the state-run firm that owned Brussels airport. At first glance it seems a relatively unimportant deal, since it is only Europe's 19th biggest airport by passenger numbers. However, it was fifth by cargo figures, making it of strategic importance as an entry point to central Europe.
The Belgian government decided to enter negotiations with two preferred bidders - Ferrovial and Macquarie - turning the friends into serious rivals. Ultimately, BIAC decided to sell the stake to Macquarie for about £510m, with the government retaining a 30% share.
Which leads to the final reason why Ferrovial might look to partners other than Macquarie. The Australian company is already the second largest airport operator in the world, so a BAA deal as part of a consortium with Ferrovial would make it top dog. This is a position Ferrovial is thought to covet, and so would look to take over BAA with smaller operators. A Spanish source says this will have been on Ferrovial's mind since the Brussels bid: "Brussels hit Ferrovial. Since then it has been looking at interesting assets - it has been looking for at least a year."
The careful expansionist
Ferrovial is not seeking a construction company. In the UK the margins are too low, bid costs too high. It wants to be a service provider
There is reason to believe that this timescale is fairly accurate. Virtually buried by all the reports on BAA last week was the £23.8m purchase of support services group Owen Williams by Ferrovial's subsidiary Amey. A spokesperson for Ferrovial says the Owen Williams purchase is "not related to BAA" and Mel Ewell, Amey chief executive, insists the same. However, a source close to the deal points out that the firm's expertise in highways, such as a £500m PFI contract with Portsmouth council, would be helpful for work at BAA, where the construction programme would inevitably include roadbuilding and improvements. According to the source, acquisition talks started last August, which may give a hint as to how long Ferrovial has considered buying BAA.
Ferrovial has a reputation for being the most astute of the large Spanish construction groups at overseas expansion - about 43% of its business comes from outside Spain - and its interest in the UK is massive. The company has previously bid for PFI hospitals in Plymouth and Peterborough - a strategy Spanish rival FCC is following by considering a bid for Plymouth. Forgotten in the past week or so is the fact that the company is expected to be a bidder - against Macquarie - for the £8bn water company Thames Water. With its two-thirds stake in Tube Lines, the consortium that runs half the London Underground network, Ferrovial is taking an almighty portion of British infrastructure.
Senior UK industry figures are also convinced the company will aim to enter mainstream construction, not just holding PFI equity stakes or providing support services. It is known that Ferrovial looked at UK contractor Mowlem, which is now being sold to Carillion. However, Spanish observers are saying that it will not seek out a construction company to complement the BAA deal. One says: "No - no construction companies. In the UK the margins are too low, bid costs too high. It wants to be a service provider."
A tough act to follow
Still, some question whether Ferrovial will get its way in the BAA acquisition. Spanish analysts believe that Ferrovial's target price is 850p a share, but BAA shareholders have already said they want at least £9.5bn - or more than 900p a share.
Also, there has to be a question mark over whether Ferrovial's expansion plans will be successful in the long run - be it the purchase of a major client in BAA or possible acquisitions of contractors. Plenty of overseas firms have fared poorly in UK construction, such as Holland's Ballast Nedam, which cut its ties with its British subsidiary, and Japan's Kajima, which is suffering from major contract delays.
A senior industry figure says similar problems would occur at BAA. He says: "The cultural fit of Ferrovial buying BAA is completely wrong.
BAA is one of the most innovative clients in the construction industry. T5 has been a massive experiment: BAA has monitored, measured, tested and improved in a way that very few clients do. And it uses this information to improve contractors, to drive forward standards."
The question remains as to whether Ferrovial has the expertise to take on this role. The source says: "No other foreign firm has been able to enter the UK construction market and adopt the role. Some have been fairly steady here but none has made the amazing impact that they may at first have promised."
The industry will have to wait and see whether this most astute of expansionists will have the opportunity to buck the trend.
Ferrovial’s presence in the airports market
- Ferrovial entered the market five years ago. The group manages airports in the UK (Bristol and Belfast), Chile (Antofagasta) and Australia (Sydney). These handle 35 million passengers a year. Last year it bought Swissport, one of the world’s leading cargo handlers, for £440m.
- In 2004 Ferrovial was one of two preferred bidders for Brussels airport operator BIAC, but lost out to Australian investment bank Macquarie. Ferrovial and Macquarie co-own Bristol and Sydney airports.
- Last year the Spanish company bid for Budapest airport against the likes of BAA and Macquarie but failed to make it to the second round.
- Leading airport operators include BAA, which runs Heathrow, Gatwick and Stansted; Macquarie, which has Rome and Budapest; Fraport, which operates Frankfurt and Frankfurt-Hahn; and Hochtief, which has Athens and Hamburg.