In the past two months alone, housebuilder Taylor Woodrow gobbled up rival Wilson Connolly for £480m; £500m-turnover Irish contractor Sisk confirmed that it is on the lookout for a UK contractor based in the South-west; Exeter-based contractor ROK has tried to buy Galliford Try; and support services groups Mouchel and Parkman have merged. Then there are the rumours of Bovis Homes and Redrow being on the verge of merging and Mansell being stalked by a large Dutch company ("Who's buying whom", overleaf).
One of the striking things about that list is that all the main industry subsectors are represented. It seems that housebuilders, consultants and contractors all think they need to bulk up. The obvious question is, what economic factors are underlying this consensus?
Until recently, housebuilders have delivered record profits on the back of roaring house price inflation, which at one stage last year was estimated at 30%. With this now settling back to 10%, housebuilders must find other ways of maintaining their margins. One way to do this is by developing economies of scale through acquisition – the larger the company, the greater its clout with its suppliers and banks, and the lower its unit costs tend to be. As an industry source puts it: "Consolidation is logical in housebuilding because of the constraints on things like buying land. Buying power becomes greater, processing costs are less."
Taylor Woodrow's purchase of Wilson Connolly made it a £3bn-turnover business, boosting the number of homes it builds from 6200 to nearly 10,500 a year, and making a combined pre-tax profit of nearly £300m – and that is before savings from consolidating Wilcon's back office are considered.
Economies of scale are most effective when firms produce a lot of similar units. And, of course, housebuilders are being called on to do just that by the Office of the Deputy Prime Minister, whose Sustainable Communities Plan envisages the construction of a city the size of Leeds just east of London.
Consolidation is also pushing major housebuilders towards the FTSE 100 index and the cash-raising benefits that go with membership of that elite club. Persimmon, which has been consistently linked with the purchase of medium-sized listed rivals, is one major acquisition away from becoming one of the UK's major companies. And Peter Johnson, Taywood's finance director, recently commented that one of the objectives of the Wilcon buy was to eventually enter the FTSE 100.
Clients wanted to deal with fewer companies, but place them on longer-term contracts
Stuart Black, MouchelParkman
On the consultant side, corporate activity has been no less fierce. Consultant engineer Hyder has drawn up a shopping list of 20 potential acquisitions, all valued in the £1-10m range.
The company made a reverse takeover of Firth Holdings last year to gain a stock exchange listing, allowing it to raise cash for acquisitions. With these buys, the consultant believes that it will be able to lift its profit margin to the peer group average of 5-10%. And the payoff is the same as for the housebuilders: Hyder believes that it will achieve economies of scale that it cannot make at its current size.
But it is not the case that bigger players are pouncing on smaller rivals who are desperate to escape. Tim Wade, chief executive of Hyder, hints that the mice are starting to realise the benefits of being eaten. "They are starting to come to us and forming an orderly queue," he says.
The £91.5m Mouchel–Parkman merger came after both sides realised the benefits of. increasing their size. Both businesses relied on government work, and the management teams sensed a change in the needs of that market.
Small local builders will find it harder and harder – there will have to be massive consolidation in the next decade
Garvis Snook, chief executive, Rok
The merger puts the new company on course to become a FTSE 350 company, making its shares more attractive to institutional investors. As a result, MouchelParkman has acquired the financial weight to take on the large public sector schemes that are starting to become the norm. E E Stuart Black, business development director with MouchelParkman, says: "It was the right time to make the move. We were seeing that clients in the marketplace were looking to place larger pieces of work, particularly in the public sector, and that they wanted [to deal with] fewer companies, but place them on longer-term contracts. We suddenly thought: 'Why don't we scale up and not get left behind?'"
Public sector work has also been vital to contractors. As the general economy falters and the commercial market suffers a slow death, the construction sector has come to rely on public sector projects. Much of this work is in the PFI, and the government's drive to make these projects larger – such as the £5bn-a-year schools refurbishment programme – demands that companies have sufficient capital and size to take on huge commitments. This means that mergers and acquisitions become more logical. Tim Stone, PFI consultant at KPMG, says: "Construction companies need a more robust capital base. These companies are still taking the development risk."
Philip Cleaver, chief executive of Mansell, does not believe that corporate activity is a top priority for medium-sized contractors. However, he concedes that it is important for larger firms: "Size is important at the top end of the market, like when you have to deal with large PFI projects." Mansell is one of several contractors rumoured to be on the verge of sale. The whispering has only intensified with Rok's failed £113m bid for Galliford Try – a move that came barely a year after the Exeter firm's £16.25m purchase of contractor Llewellyn, which helped take the group to a record pre-tax profit of £4.5m in 2002.
Despite the recent rumours and bids, Kier chairman Colin Busby says that Galliford Try and Mansell have effectively been available for quite some time: "We first asked about Galliford Try four years ago, and we could have bought Mansell three years ago for £60m." So why have they not been targeted until now?
Bridgewell analyst Howard Seymour says that contractors are looking to import skills so that they can provide the entire range of building services that projects today generally require: "It is a case of expanding on the skills set you've got to appeal to new clients. You can offer your contracting services into new markets."
Rok chief executive Garvis Snook believes that the reason lies in a general shift in perception – the industry has woken up to the fact that it should be making real profits; Galliford Try's construction division was in the red for most of 2002. "The industry has grown consistently for the last seven to nine years, yet still construction businesses are making pitifully low returns. There are synergistic benefits to putting businesses together," he says.
One of these benefits involves the supply chain. Subcontractors tend to provide better service if they deal with a few major contractors on a repeat basis, rather than several smaller ones.
Who’s buying whom: Recent corporate takeoversHousebuilders
- At the start of September, Taylor Woodrow launched a £480m bid for medium-sized rival Wilson Connolly. The takeover, which was accepted by 94% of Taylor Woodrow’s shareholders last week, creates a £3bn turnover business building nearly 10,500 homes a year. It also moves Taylor Woodrow closer to the FTSE 100 index.
- Earlier this month, Stephen Wicks, the chief executive of Country & Metropolitan, told Building that his firm had been the subject of “passing interest” from an unlisted rival. But Wicks told it to “come back for a chat in a couple of years” – Country & Met is more interested in acquiring rather than being acquired. Following the takeover of NorthCountry Homes last year, it is eyeing up Headway, a developer listed on the alternative investment market.
- In August, support services groups Mouchel and Parkman announced £91.5m merger plans. The logic behind the deal was to acquire the capacity to win larger projects and to enter the FTSE 350 index within 12 months. Although the deal cost about £3m to set up, the directors of the company believed the merger would lead to a £2m reduction in operating costs in the first full financial year.
- Last month, consulting engineer Hyder told Building that it had drawn up a list of 20 potential acquisitions. The firms are all valued at around £1-10m and employ between 20 and 50 staff. The first of these, Australian land consultant, Jeff Moulsdale & Associates, was bought for £1m earlier this week.
- In September John Sisk, an Irish contractor with a turnover of £500m, confirmed that it was looking to expand its presence in the south of England be means of an acquisition. Sisk said it was in advanced talks with several large construction firms in Cardiff, Bristol and the South-west. It was believed that these included Cowlin Construction, Pearce Construction and Midas Construction.
- At the end of last month, Galliford Try announced that it had rejected a £113m bid from Exeter-based rival Rok, as it undervalued the company. Rok did not withdraw the bid, and told the London Stock Exchange that it was still “seeking to commence a constructive dialogue with the Galliford Try board”. Insiders at Rok have since admitted that the company is eyeing up alternative targets.