Gleeson sells building arm in black month for contractors

Listed contractor Gleeson has dramatically pulled out of the building sector after its main contracting division racked up a £16.6m loss for the second half of last year.

Tuesday’s announcement of the management buyout of Gleeson Building ends a black month for listed contractors, following losses on contracts declared by rivals Mowlem and Alfred McAlpine.

The trio’s plight underlines the fact that, despite healthy workloads, many contractors are still facing wafer-thin margins and high risk.

Gleeson’s struggling division is to be sold to a management team led by recent recruits Martin Smout and Peter Stone, the division’s managing director and commercial director respectively. The deal is understood to be a mixture of a buyout and earn-out, whereby the management would pay Gleeson back based on future results. The division has a turnover of about £200m and has 500 staff, having cut about 100 jobs in the past six months. It is understood negotiations are under way as to which party would retain liabilities for completed contracts.

Building understands the decision to pull out was made about a month ago and follows a reorganisation of the division late last year.

A Gleeson statement said the loss mainly related to “large and highly complex design-and-build contracts”. These include two completed schemes: the delayed £60m Evelina Children’s Hospital in south London and the £45m Tally Ho Corner mixed-use scheme in north London. Final accounts have yet to be signed on both schemes.

The sale will further reduce the group’s exposure to construction risk

Dermot Gleeson, group chairman

Sources close to the firm said that closer inspection of the division during its restructuring had led to a rethink. One source said: “The more the team looked at the division, the less attractive it became compared with the other parts of the business. Building in the UK still seems to be thin margins and big risks. It doesn’t seem to get any better.”

Rivals, however, claimed that the firm had taken on too many big jobs. One said: “They took those jobs on the wrong terms.” One rival also speculated Gleeson’s move could be mirrored by Mowlem, which reported a £7.4m loss at the start of the month due to poorly performing UK contracts in its M&E business.

The losses and sale also led to a change in senior management at Gleeson itself, with group managing director Andrew Muncey resigning, and Gleeson Homes managing director Terry Massingham becoming chief executive.

The building division’s troubles led to a £6.7m pre-tax loss for Gleeson for the six months to 31 December 2004. The group said its regeneration and housing divisions had performed ahead of expectations.

Dermot Gleeson, the group chairman, said: “The proposed sale of Gleeson Building will further reduce, very substantially, the group’s exposure to construction risk.”

• Building understands that Alfred McAlpine took a £27m hit last year partly because of a problematic construction contract in Guildford. The £11.5m Onslow House office scheme is not expected to be finished until next month, two years after its initial completion date.