Breaking amec

Recent traumas at Amec have captivated observers in the City and the construction industry, with rumour and counter-rumour spreading as to which parts of the business will be sold off, and who will buy them.

To outsiders, Amec was seen as an unwieldy business, with a net debt so high – an average of £450m in 2004 – that one leading analyst suggested that it was in danger of breaching its banking covenants. Now the company’s board has acknowledged the need to restructure the business, a realisation prompted in part by a £70m hit on key contracts. A fortnight ago they hung a “for sale” sign on Spie, a French-based services business and the group’s main profit generator. They then proposed splitting the remainder of the company into two quoted businesses, one focused on UK infrastructure - essentially a construction business merged with design, facilities management and investment arms - and the other on energy and process industries.

To a whole generation of contractors who started or developed their careers at Amec, these changes look like the end of the compelling vision: the contractor as one-stop shop. Oliver Whitehead, Alfred McAlpine chairman, worked for Amec in the late 1980s, and remembers the phrase as belonging to Sir Alan Cockshaw, the then chief executive. Whitehead says: “He was one of the first fellas at Amec to use the phrase ‘one-stop shop’. That was one of Alan’s mantras. He wanted to try and ensure that companies went to Amec for all their construction needs.”

Whitehead adds that Sir Peter Mason, who has been the chief executive since 1996, seemed to follow the same path: “I’ve been a big fan of Peter for many years. What he recognised was that there needed to be more to Amec than just civil engineering and construction.” But Mason is no longer going down this route. Quite what his alternative is is open to speculation. One suggestion is that he will look to sell the UK infrastructure business and concentrate on the emerging oil and gas markets, although an Amec spokesperson says there has been "no hint" of this. Another is that everything is up for sale.

Illustration by Daniel Mackie

Predictably, the change of strategy has not been popular with many Amec people. One man who recently left Amec encapsulates the feelings of many of his peers: “We all walked with Amec in following the path of integrated services. This seems as though it is the admission that it can’t happen. It seems to be a bit of a cop-out.”

Cop-out or not, the break-up certainly takes Amec back to its roots. In November 1982 contractor Fairclough and oil and gas specialist William Press proposed a £160m merger that would create an international group employing 26,000 people. Although Amec has developed since then, with much of its work turning towards services such as design and construction management, the conglomerate model has remained. It has taken nearly a quarter of a century for Amec's management to reject it, and a City that has turned its back on businesses with a broad focus will not mourn the loss. Charlie Cottam, an analyst at Panmure Gordon, says:

“It was trading at a discount for being a conglomerate. It makes sense to realise value by breaking it up.”

We all walked with Amec in following the path of integrated services. This seems to be an admission that it can’t happen. It’s a bit of a cop-out

Former Amec employee

Cottam believes that, even though Spie has a book value of £280m, it could fetch as much as £550m on the market: “It looks like a great business. There will be a lot of competition.” Sources close to the proposed sale say the French management is pushing hard to buy out the business with the backing of a venture capitalist, but its wish is unlikely to be granted as Amec has assured the City that it will sell to the highest bidder.

Not everyone is convinced by the sale – even Cottam has only raised his valuation of Amec from 380p a share to 400p since the announcement, despite his enthusiasm for the restructuring. Spie contributed £75m to Amec’s £118m pre-tax profit in 2004, so it is vital for the future. It is only through that company that Amec can maintain growth. Also, the sale could end up increasing debt on Amec’s balance sheet. The company is thought to owe debtors £60m for securitisation of a loan to buy Spie, and would also face the loss of cash reserves of £50m within the business.

Another school of thought is that as potential bidders examine the Spie business more carefully, they might lower their bids. One France-based investment house, which has taken an interest in the UK construction sector over the past few years, took a close look at Amec towards the end of 2003. “I don’t like Spie,” says one of company’s traders. “It’s a complete melange, a million different businesses. The telecoms business alone made seven acquisitions in 2001. It’s mad – 26% of it is in services such as facilities management and power generation, 43% is in construction, 2% in investments and so on. It has 71% exposure to France – and this country is a bit messed up.”

The trader concludes: “Why would you sell the jewel in the crown? The real question is: ‘But is it a jewel?’”

Interestingly, the trader adds that if his company had bought Amec, it would have broken it up – the conclusion the management has only recently reached. And even some die-hard fans of the Amec one-stop shop model felt that this was the only possible result: “There has been a problem with Amec every year for the past few years,” says one. “It probably got to the stage where its balance sheet couldn’t back the growth of the business, so the management had to make a fundamental decision on the way it had to go.”

With any era, there has to be an end, and for the one-stop shop, this appears to be it.