Mergermania hit construction in 2005. Now the predators are circling again in contracting, consulting, housebuilding and building materials. Angela Monaghan and Mark Leftly ask who'll get snapped up next - and who'll do the snapping
It was a busy time in the fish tank last year. Balfour Beatty and Carillion began chasing Mowlem, MJ Gleeson faced a hostile takeover from venture capitalist Castle Acquisitions, Persimmon gobbled up Westbury for £643m and French materials giant Saint-Gobain bought UK plasterboard firm BPB for a cool £3.9bn.
So, entering 2006, Building thought it would be interesting to speculate on which companies would be chasing a good meal, and which would be trying to escape their jaws. As well as the three sectors of contracting, housebuilding and materials, we have consulted far and wide on the acquisition plans of consultants.
If even a small portion of the speculation is correct - and Costain and Balfour look ravenous - it will be another big year for buyers. And not just for UK contractors. With the emergence of Castle Acquisitions and the suggestion from Vinci Construction chairman Philippe Ratynski that he's looking for a British regional firm, it seems that the sector is looking increasingly appetising to venture capitalists and overseas giants …
Many European and US consultants are anxious to find individuals or firms with a knowledge of PPP projects as the procurement route grows in popularity. As the UK has the largest reservoir of expertise, foreign firms will be looking for a chance to buy in British talent. According to one leading QS, the stumbling progress of PFI hospitals may give them the chance that they've been looking for. The delays and cancellations that have hit schemes such as the Queen Mary health campus in Paddington, west London, and the recent doubt over the £1bn St Bartholomew's and Royal London scheme underline this. So might firms that worked on them, such as Turner & Townsend and Gardiner & Theobald, be ripe for merger?
Rob Smith, senior partner in Davis Langdon, argues that there is "a whole generation" of principals looking to retire. Four times in the past six months he has been approached by third parties proposing he merge with firms employing up to 30 staff. Davis Langdon is an unlikely buyer, though, as is Gleeds, whose senior partner Richard Steer is more likely to lure individuals from niche firms rather than buy the practices. He says: "Some people want to be in a small company, and they get frightened and therefore less productive if a big firm takes them over."
Among the architects, Aedas, the world's sixth largest practice, is looking at building alliances with US outfits as it tries to drive growth into that market.
Of the consulting engineers, look out for Hyder, which pledged to pursue its "infill strategy" of small acquisitions in its last annual results. It created a warchest for this from funds raised in an open offer and placing in March last year.
First, the love triangle: it has been long mooted in the City that a tie-up between any two from Redrow, Wilson Bowden and Bovis Homes is logical and likely. Consolidation among housebuilders in 2005, in particular Persimmon's acquisition of Westbury, which will catapult it into the FTSE 100, has prompted many to believe that these bashful glances might finally turn into a firm proposal of marriage.
Redrow, with a market capitalisation of about £800m, is not the biggest of the three, but it is in the strongest position. Last year, its pre-tax profit rose 14% to £141m whereas most of its rivals reported a fall caused by the weakening housing market. Certainly, Redrow would wear the trousers in a partnership with Wilson Bowden, which according to one City source "has lost its way" of late. In its last interim results, pre-tax profit for the first half of 2005 dipped below £98.5m, down from £113.4m in the same period in 2004.
The City source said: "There will be a deal that will see two of them coming together. Redrow is in a position to fix its own fate and it won't want to sit on the sidelines while the rest of the industry consolidates. Redrow is in such a good state that it can pick and choose. Wilson Bowden would give it critical mass."
If Redrow decided to woo Bovis Homes, it would again be the dominant partner, as the latter is thought to be too reliant on a diminishing landbank. Also, earlier this month, Bovis Homes announced that its results would be slightly below forecasts.
Among the sector's giants, a tie-up between Taylor Woodrow and Wimpey has long been rumoured because their north American businesses would make for a strong geographic fit: Taywood has a larger presence in Canada and Florida, whereas Wimpey is more dominant in California.
Barratt, the biggest housebuilder by volume, has not acquired a company in the past 13 years, but this may be about to change. A City analyst says: "Pretty won't want to be number two to Persimmon, that's for sure." There is some circumstantial evidence that Barratt is made some board changes to counter Persimmon.
The materials market is quite mature, and consolidation has been continuing for the past few years. Richard Sanders, partner at Catalyst Corporate Finance, argues that there is still room for some deals this year. "All the materials companies are trying to grab geographic market share and diversify in terms of product offering," he says.
One product that might prove tempting is the conservatories market. Demand for these has suffered because of the downturn in the housing market, making large companies such as Ultraframe vulnerable to predators. In the year to 30 September 2005, Ultraframe made an £8.5m pre-tax loss, compared with a £3.6m pre-tax profit in 2004, so could presumably bought at a discount.
Builders merchant Travis Perkins has also fallen from grace since it bought DIY chain Wickes for £950m early last year. It has warned investors that pre-tax profit for the year to the end of December 2005 fell £20m from £225m to £205m. The results announcement is expected on 8 March, and the sharks are circling.
Finally, concrete products supplier Marshall is thought likely to be snapped up soon, simply because it it one of the few independents left.
Traditionally, it has been the large overseas materials companies that have looked to buy in the UK, but it might be a slower year given that French giant Saint-Gobain is digesting its £3.9bn purchase of BPB, and CRH, the acquisitive Irish aggregates group, recently warned that it "won't overpay" for any additions.
Balfour Beatty's pursuit of Mowlem has revealed its appetite for a big acquisition.
If Carillion wins that race, as many expect, Balfour might be on the lookout for an alternative purchase to maintain its dominance over its bulked-up rival. One option is MJ Gleeson. The company is attempting to spurn the advances of Castle Acquisitions but even if it succeeds, few in the City think it will remain single for long. One source described Gleeson as "fruit waiting to be plucked", having sold its general building contracting and internal plant hire operations last year.
Costain has been mooted as a possible target, but it looks more likely that prey will turn predator. The company is understood to have told brokers that it is looking to add a division to its building and civils arms by picking up a firm for up to £200m.
A more likely quarry is Morgan Sindall. Hungry buyers will surely notice that the business is doing well in three key growth areas: fit-out, social housing and regional contracting. In its last interim results, margins and profit increased in all three areas.
French giant Vinci could take a look at Bluestone, Morgan Sindall's regional contracting business, after chairman Philippe Ratynski told Building this week that it needed local businesses to improve its UK coverage.