Kier and Mouchel – an understandable attraction

News last week that Kier was having a good look at Mouchel as an option for a takeover should be a surprise to no one.

Kier has a new chief executive in Haydn Mursell who took over from Paul Sheffield at the end of June and he is on record as wanting double digit growth for the business in the next five years; something that is really only possible through takeovers.

And Mouchel effectively put itself on the market when it hired Rothschild in the summer to research its options for the future including the possibility of refloating the firm after a spectacular turn around under CEO Grant Rumbles. 

Kier's revenues are up 51% to £3bn following the acquisition of May Gurney and underlying pretax profit was up 54% to £73.1M. The company earned over half its revenue in construction with a  margin of 2.1%. But tellingly just over 30% of its revenues came through its services division with a margin more than twice that of construction of 4.8%.

A services business like Mouchel, with a strong presence in the highways sector and maintaining around a third of the Highways Agency network just as the £15bn English roads bonanza is about to kick in, has obvious appeal. Add to that margins of around 5% on revenue in 2013 of £555.1M,  solid contracts overseas in the Middle East and Australia and 6,500 staff who, with personnel a high value currency in a growing skills shortage, have their own glamour.

Yet for all that, Kier said in its statement confirming that preliminary discusssions had been held with Mouchel, “there can be no certainty that an acquisition of Mouchel will be completed.”

But clearly the attraction is there. And Kier will be keeping a weather eye on the challenges currently afflicting other contractors, with Mouchel potentially offering an interesting change of emphasis, creating less reliance on the stormy waters of contracting.

According to Osborne chief executive David Fison who has a reliable reputation as a commentator on the world of contracting, many of the major contractors working in the UK are currently having a bit of a nightmare.

“It’s a perfect storm,” he says. “We’ve just had a recession that went on twice as long as anyone can remember and how does a contractor behave in a recession?  – it shifts as much money into its back pocket as possible via fixed price jobs. Then it consumes money trying to keep the business alive and hangs on to critical mass so it can ramp up again when the recession is over. But that takes cash and there will always be the odd bad job."

He adds: “Then we had a sudden upturn when no one predicted it, accompanied by an uplift in prices for materials and services just when most of the jobs on the books were fixed price.

Fison also points out that the push for prompt payment and project bank accounts plus the cash positive state the contractors need so they can trade at low margins disappeared. Zero interest from the banks added to the problem.

All that pressure means that you cannot work at 2.5 or 3% margins. Somehow margins have to be pushed up.

“Shortage of people just adds to the issues,” he says. “The industry lost around 350,000 in the recession and we are going to lose a similar number over the next five years as the aging workforce retires. 20,000 apprentices are not going to solve the problem; technology eventually will, but not in the next few months. Which all means the price of labour is going up; so you have a perfect storm.”

Against this background Kier’s interest in Mouchel seems logical and the sector will be watching keenly as to how events unfold.

As an aside, that same perfect storm is something to be borne in mind when considering Balfour Beatty’s quick rejection as “undervalued”  of John Laing Infrastructure Fund’s £1.05bn offer to buy its PPP assets last week. Having just offloaded Parsons Brinckerhoff which provided a third of its profits,  the PPP portfolio feels integral to the Balfour business.

As the Balfour Beatty Board said: “The strategic value and synergies from owning the current Investments business - both the PPP portfolio itself and the skilled team that operates and develops the business - is material to the Balfour Beatty group as a whole. The group's Construction and Support Services businesses derive real value from the Investments business being in the group, something which needs to be taken into account in valuing the group as a whole, and in evaluating any proposal to acquire the Investments portfolio or business alone.”

Laing is still circling Balfours and there are rumours Carillion may join the hunt in February after its attempt to buy the business failed earlier this year.

It’s going to be an interesting start to 2015.


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