Back from the brink

"Costain's short term problems have been greatly eased," says UBS analyst Mark Hake of the rescue package organised by a Malaysian infrastructure company, Intria, and a swathe of banks.

Although the contractor's Stock Exchange shares remain temporarily frozen, it should soon enjoy a slight cash surplus thanks to the planned œ73.6 million injection of share capital and the imminent sale of its now healthy US coal interests.

But the story is not over yet, it seems. Nicholas Bull, investment banking director with Deutsche Morgan Grenfell, the contractor's retained financial advisor, says of the Intria deal: "It is the only deal on the table today. But I couldn't predict if it will remain the only one. Things could change up to the end of the month."

After existing shareholders agree to the issue of new share capital at an Extraordinary General Meeting on 22 July, share trading should resume before the month is out.

Technically, the open offer of new shares is a rights issue. However, existing shareholders are not expected to take up the three-for-one offer. It is expected that most of the new shares will be taken up by the underwriters of the offer: Intria and the banks. If Costain's long-suffering shareholders had been willing to pump in more cash, the situation would not have been so difficult for the contractor.

The key to the rescue plan is that the share offer has been underwritten. The banks have agreed to the deal because a private investor is prepared to come on board. The deal, according to Bull, is "quite complex" and will see up to œ36.2 million in debt converted to equity

There are a number of reasons for the deal's complexity. Intria may gain up to 40% of the expanded share stock following the offer. But it does not want to make a formal takeover bid for Costain which is obligatory if a shareholder owns more than 30% of a company's shares. A resolution to absolve Intria from that duty will be put to existing shareholders at the EGM.

The deal has also required "special dispensation" from the London Stock Exchange, an arrangement which was part of Intria's condition for the Costain buy-in. The need for special arrnagements comes from the rule that the number of "free float" shares in a company quoted on the Stock Exchange must not fall below 25% of the total company shares.

Should Intria and the banks end up with the full quota of new shares which they have underwritten, the free float will have dropped by more than half to less than 20%. "This would be unusual for a quoted company," says Hake.

Bull had explored a number of possible financing deals for the ailing contractor. But doubts existed over any rights issue mechanism without underwriting, due to the company's delayed annual results.

It is generally agreed that this type of deal is the best Costain could expect. Talks have been underway for months to secure the Intria deal, says Bull.



The Deal Maker

Intria is an investment holding company which works in both construction and toll road operations in Malaysia. The company has a market capitalisation of more than œ400 million on the Kuala Lumpur Stock Exchange. Just over half the shares are owned by a private company, Mekar Idaman, which aquired Intria in November 1995 and re-focused its operations away from chemicals to infrastructure.

Intria's sister companies in the Mekar Idaman group operate overseas, principally in Latin America. One has a toll concession in Buenos Aires due to start construction later this year, another is building a township in Uruguay. The companies are also chasing pre-qualification next month for a 43km long causeway linking Argentina and Uruguay, plus a œ200 million bridge project in Argentina.

But Mekar Idaman 's real action is in South East Asia, with Intria.

Its construction subsidiary, Nik-mat Plantar (M) Sdn Bhd is tackling property development. A wholly-owned subsidiary operates the Penang bridge, which was acquired in 1993. A second Penang crossing could be in the offing, according to Mekar Idaman. A partly-owned associate company, Metacorp Bhd, is chasing five other toll road packages in KL.

A spokeswoman for Mekar Idaman says that Costain is "highly respected in Malaysia for its construction and engineering skills."

The contractor already has tie-ups with Malaysian firms, which she does not see as being a problem. Costain Bhd, its local arm, had been part of a group seeking pre-qualification last year for the huge private Bakun hydropower project, but pulled out of the international consortium interested in the main contract, understood to have included massive liquidity damages for late completion.

The spokeswoman anticipates that Costain could work both in South East Asia and in Latin America with Mekar Idaman.

Costain would continue its UK operations itself, though the spokeswoman noted that equity investment in Costain PFI projects may be possible. This reflects Intria's overall attitude to the contractor - as investor, not controller. That being said, Intria is to have four representatives on the Board of Costain.



Trading Places

The Malaysian investment group is obviously in a strong negotiating position. "The shareholders don't have much of an option," said one analyst. Generally, though, analysts agree that the rescue package is a strong brew to sort out Costain's financial health.

But Costain has requested that the freeze stays in place until 31 July, when the "open offer" should be concluded. Bull says that suspension of the share listing needs to continue to reduce speculation.

The Stock Exchange outlaws "false markets." As such, the the contractors and deal makers want to see how the share sale goes through; they want to assess the new circumstances for trading before opening the gates again to the market.

But uncertainty lingers. August will see some interesting share activity due to the unusual arrangements with the London Stock Exchange. "It is quite difficult to predict what will happen to the share price after they are unfrozen," says Bull.

Costain's fortunes have worsened over the last seven years with unsteady, declining preformance traumatising the contractor.

In July 1990 the shares were trading at 242p, but almost 100p was wiped off by the end of the year. Early 1991 saw a brief rally but an even greater drop followed.

By the end of the year shares were trading at around 60p, which lasted until mid-1992 when the floor fell again.

Last autumn the 10p per Ordinary Share threshold was breached. At that point Costain arranged to revalue the shares through an special exchange mechanism: ten 10p shares were traded in for one 100p share.

The value held steady at that low level until a few months ago. After a micro-rally two weeks ago the value had fallen to 77p. It plummeted to 39p last week before Costain asked for trading to be suspended.

The listing suspension was won as the contractors and its advisers were in the final stages of intense talks with Intria.

All seems well at the moment, though we wait to see where exactly the shares will fall. But City commentators and analyists are not yet ready to comment on the long term picture for Costain.