Top contractors tipped to merge

Five top contractors - including Alfred McAlpine and Mowlem - are tipped to be swallowed up by industry restructuring in the next five years. At the same time, the industry could face 'a new threat' from construction groups that have merged with major utilities.

The predictions are made by NatWest Securities in a far reaching review* of performance and prospects for the industry's contracting divisions.

The study concludes that margins will tighten this year, and will not exceed 1% before 1997. Blacker still, it anticipates that average margins of 2% will not be exceeded before the millenium. Volume is expected only to keep pace with the country's GDP, adding further to the subdued picture.

So poor are the prospects that NatWest Securities says the share price of some groups assumes their contracting businesses are worth a hefty minus figure.

Worst rated are Taylor Woodrow (whose share price assumes a negative value of œ177 million) and Wimpey (-œ75 million), followed by Laing (-œ27 million) and Gleeson (-œ17 million). Conversely, the contracting businesses of Tarmac, Tilbury Douglas and Trafalgar House have been over rated by the stock market, leaving the parent's share price at risk.

NatWest Securities is heavily critical of accounting policies employed in contracting, which it says are so 'incredibly flexible' as to be meaningless to investors.

Analyst Robert Donald said: 'I know one or two companies that present conservative accounting policies and say "that's what we do".

'But in reality, that policy may only be used by one division, and even within that division it may be applied inconsistently. The degree of flexibility is amazing.'

Such inconsistencies would be a major hurdle to hostile takeovers, and Donald concludes the only way for potential bidders to obtain reliable information is with a cooperation of the management in an agreed offer.

The report also draws attention to the serious under-capitalisation of the industry, as it is pushed towards the new era of capital-hungry private finance projects. The shareholders' funds of sixteen top groups now supports a level of turnover 62% higher than in 1986.

In future, contractors with insufficient balance sheets will be forced to merge or downsize.

'As far as restructuring is concerned we'll be somewhat surprised to find McAlpine, Mowlem, Birse, Costain and Galliford operating as independent entities within the next five years,' said Donald.

NatWest Securities believes the dream ticket for the future will be a construction group teamed with the financial muscle of a major utility, such as Bechtel and North West Water; or Trafalgar House and Northern Electric.

Such alliances could 'create a new threat to the UK industry,' NatWest Securities predicted.

* Strategic Assessment, UK Contracting: Restructuring Required, NatWest Securities.