Five months after the buyout, managing director talks about turning former Gleeson arm’s £16.6m loss into a £4.8m profit by focusing on smaller education, health and residential projects

In March this year Gleeson revealed that its building division was going to make a £16.6m loss and decided that it was time to get out of the business altogether. One month ago, Martin Smout, who was managing director of the division, completed a management buyout and in his first interview since the deal he tells Building how he plans to rebuild the firm, achieve growth and then float the company.

For a man who has just bought a loss-making company, Smout appears relaxed and upbeat.

And he has reason to be positive. Gleeson has retained a 20% stake, which enables the buyout team to delay paying the full price for the division for five years – “once we’ve built the business up”, says Smout. They do not have to pay anything at all for the business until the end of the third year.

The new company’s three directors – Smout, commercial director Peter Stone, and finance director Michael Lethaby – own the remaining 80% of the company. Dermot Gleeson will sit on the board as a non-executive director.

Also as part of the buyout agreement, Smout agreed that Gleeson take on the liability of the loss-making contracts. “We don’t carry the legacies of the past,” he says, although Gleeson Building will still manage those projects.

Smout is not obliged to release financial forecasts for the business, but has produced a comprehensive set of profit and turnover estimates for the next five years. His aim is to make a modest pre-tax profit of £145,000 in the year ended 30 June 2006, rising to £4.9m in 2010. Smout is chasing a more moderate growth in turnover, up 20% from £227m next year to £272m in 2010.

To achieve those aims, Gleeson Building is to focus on the education, leisure, apartments and residential schemes for key workers and retired people, and the non-acute health sector. It is targeting projects worth £5-25m. Smout does not rule out work in PFI, and is hoping to pick up the work from Gleeson: “We still have an ex-parent that is doing PFI,” he says.

Once the five-year business plan is completed, Smout says that one of the options being considered is a flotation on the alternative investment market – the consequences of which have already been written into the buyout agreement. Smout says: “If we were to float on AIM, Gleeson would get 45% of the proceeds.”

The quoted contractor racked up a £16.6m loss for the second half of 2004 after failing to correctly assess the risk on a handful of contracts and taking on too many big jobs in too short a time.

“It had grown from a £100m to a £300m business in three years,” says Smout. “With that rate of expansion and by entering more complex markets [such as PFI and design and build], if you’re not careful you won’t be able to identify the risks and therefore you can’t manage them. That is something we have to be more careful about in the future, as does the industry as a whole.”

Gleeson was taking on projects of up to £45m, when in the past it had taken on contracts worth £5-10m. The point is illustrated by the size of two of the projects that contributed to the £16.6m loss – the delayed £60m Evelina Children’s Hospital in south London and the £45m Tally Ho Corner mixed-use scheme in north London. “We won’t be doing another Evelina,” says Smout.

To criticise the old regime while Dermot Gleeson still has a hand in the new one may seem risky, but Smout knows he has to convince clients that past mistakes will not be repeated. Smout and commercial director Stone are unlikely to be held to account for these past mistakes because they only joined Gleeson in June 2004 and this January respectively.

Smout denies Gleeson Building will be tarnished by its name: “We have a licence to use the Gleeson name for three years and there is still value in the name. We want the continuity.”

But they still have firm links with the past. For a start they have kept the brand and Smout, along with the 400 staff he acquired with the buyout, are still based at Gleeson’s office in Cheam, Greater London.

Smout admits that one of his main challenges is boosting the morale of the staff that Gleeson Building inherited. “The staff felt a bit dejected at first and it was a case of making sure that they recognised they had a good future.”

Part of the challenge of rebuilding the business is also to attract and retain new staff. Smout has wasted no time in bringing in his own people, most notably with the appointment of Lethaby. He has also touted the idea of creating a junior board to allow the most talented of the younger staff to have an input into issues such as branding.

The immediate plan is to centralise the business so that each of the five regional businesses – London and the South-east, the Midlands, Yorkshire and north Midlands, the North-west, and the North-east – is supported by central human resources, IT and accounting services. A scheme whereby the top 10% of management are able to buy shares is also in the process of being introduced and the head office will be relocated to Sunbury, Surrey, by the end of the year. “Dermot is an influencing factor,” Smout says, “but it’s down to us now. It will feel different when we move to Sunbury as there’s an element to the culture that hasn’t changed yet.”

It is impressive that Smout has made such positive plans for a business that has fallen from grace, but he will now have to live up to the expectations he has set.