Andrew McNaughton says ‘Phase 3’ of restructuring could see UK’s largest contractor withdraw from some markets, including social housing

Balfour Beatty has signalled it will initiate a third phase of restructuring of its construction business that could see it withdraw from some markets, including social housing, as the industry behemoth continues to adapt to deteriorating market conditions.

This week (8 November) the £11bn turnover Balfour Beatty Group said “difficult trading conditions” have persisted in both the UK and the US, and the performance of the UK construction business was “weaker than anticipated” as it continued to “migrate towards smaller contracts in a market with very few major projects”.

The firm also pointed to a decline in its European rail business, with activity in Spain and Italy “critically low”, and warned that profits across its construction business would be around £10m lower than anticipated in 2012.

The contractor’s share price tumbled 16% on the news - and was trading at 248p at close of trading on Friday (9 November), down nearly 20%, wiping nearly £400m of the value of the company.

Alongside the announcement, Balfour Beatty chief executive Ian Tyler said the firm would build upon its ongoing restructure of its UK construction services business through what he said would comprise a “Phase 3 cost reduction programme”.

This followed the contractor’s “Phase 1” programme that involved £30m of savings by the end of 2012 through centralising procurement and other back office functions in a shared services centre in Newcastle; and “Phase 2”, the detail of which was exclusively revealed by Building last month, which will see the industry behemoth cull six operating companies and reshape its business around four regional hubs. This will contribute around £30m in cost savings to the £50m in annual savings the Group plans to deliver by 2015 through Phase 2.

Tyler said ‘Phase 3’ would be “responsive to somewhat different market conditions than those that we had anticipated” and would involve the firm “desisting form certain areas of the market”.

Speaking to Building, Balfour Beatty deputy chief executive Andrew McNaughton said the Group was looking at areas “where it might be right to move out of at this point in time”, particularly the European rail business, but also areas within the £3.4bn turnover UK construction business, including social housing.

He said: “We’ve flagged that specifically we are going to need to look at our operations in rail in Europe for the right and sensible reason that we’ve been watching it for long enough and hard enough to know that Italy and Spain now are not going to recover anytime soon.

“We’ve already said fit-out is something we want to rationalise and we’ve been doing that. But there are some questions - and I say they’re questions because we haven’t made any decisions about it - in terms of social housing, because the volume in that market and the amount of progress that is being made in putting that out to the market at the moment is quite low. And therefore …we have to question what we do with that.”

The move would impact on £175m turnover Mansell Partnership Housing - part of the Mansell regional construction brand - which offers new build, refurbishment and regeneration. “No decision has been made - we are taking the time to look. But it wouldn’t be a surprise that we are looking at that given the lack in starts in that particular sector in the last two years,” he added.

He said the company would also look at other areas beyond social housing, but that these were at “a much too early stage” to give detail. He said a decision on what market areas to pull out of would be made within the next year, along with other cost reduction measures.

He said there had been no cost reduction target had yet been set for the next phase of the restructure and added that it was “too early” to talk about the impact on jobs.

He said the firm was already taking actions in the US to consolidate its divisions from five to three, as well as consolidating the back office of its professional services division.

McNaughton said there was “surprise” from some of the firm’s investors at the market reaction to the firm’s statement, given that the “vast majority of our business is in an absolutely robust position”. “One piece of our business is marginally below the expectation of what we saw for the year,” he said.

“The facts are that we four operating divisions in our business. Our support services professional services and investments business account for 70% of our business.

“And what we are absolutely clear with our investors is all three of those divisions are absolutely on the nail as to where we expect them to be; hit the expectation we have for the year; and are in a particularly robust position.”