Predators close on Costain

Costain has opened talks with a potential predator in what is tipped as the start of large scale rationalisation of the contracting industry.

The board made the disclosure last week as shares leapt by over 20% on takeover speculation.

The two leading contenders are thought to be Hochtief and Bovis. The former, which failed to take over Phillipp Holzmann, has a cash pile of DM 2.3 billion at its disposal, and has been keenly eyeing the UK's infrastructure and PFI opportunities.

It has long standing contacts with Costain through the Channel Tunnel project, and would find its contracting interests in Hong Kong and the Middle East an ideal fit with its own overseas operations.

For Bovis, a deal with Costain would give it a civils capability and compensate for its over reliance on fee work. As with Hochtief, Costain's overseas business would redress areas of weakness in its own substantial foreign portfolio.

Head office and building division staff are expected to be in the front line of rationalisation following a takeover.

One analyst predicted that the building arm, being more labour intensive, would be closed altogether; while Building Products, which includes GKN, would be sold. The board, including Peter Costain, would almost certainly stand down.

Current expectation is for a sale at around the present share price of 22.5p. However, a city analyst said that the board must achieve more to vindicate itself: 'I believe the management really must get 30p or more per share to at least give investors back what they put in with the rights issue.'

It is thought Hochtief, which specialises in associated holdings might take only 40% of the company - enough to bolster it financially, but a disappointment to institutional shareholders desperate for an exit route.

Robert Donald of NatWest Securities said: 'If Costain is taken over - in whole or in part - I believe it will really cause managers to revisit the issue of whether their companies can go on as they are. A consequence [of a takeover deal] must be that the rationalisation of the contracting industry accelerates.'

Donald is on record as tipping Alfred McAlpine, Mowlem, Birse and Galliford as likely takeover prey.
Amec has given a hint that it intends to take over another contractor or even merge with a utility or non-construction group. Chairman Sir Alan Cockshaw has told CJ the company is determined to have a place in the emerging 'Super League' of contractors.

'The UK contracting scene will soon see fewer major companies... Amec will still be around - and I am sure we will play a part in that rationalisation process,' he said in an interview to be published in CJ next week.