Costain share deal fuels takeover speculation

Costain is likely to be taken over following its rights issue last week, according to informed sources.

The £430m-turnover group raised £60m through the issue of 270m new shares following market rumours the group was struggling to obtain performance bonds due to its weak balance sheet.

Although the move has steadied the ship, it has left the two largest shareholders (Malysian-backed Daedulus and Kuwaiti-based Kharafi) with a combined stake of less than 50%, increasing the chances of a sale amid reports that Daedalus wants to exit.

The new shares were priced at a 36% discount of 24p.

One City source told CJ: “The free-float (shares available for trading) has gone above 50% for the first time in a decade. From now on any deal would only take a couple of phone calls. There’ll be a lot of companies running the rule over them.”

The source said Daedalus’ exit from Costain would probably not happen for a “good few months” because the company wants to “wait for a decent return and exit with dignity”.

Panmure Brown analyst Andy Brown agreed there were suggestions Daedalus was looking to “tidy itself up”. He also said the UK market was now more open to acquisitions. “Ten years ago it would have been a complete no-no, but with the recent deals that have taken place, it’s now a possibility. There’s enough guys out there with an appetite to buy.”

Potential buyers are thought to include Skanska, Bouygues and Hochtief, and analysts put the sale price at between 45p and 60p per share.

The rights issue comes at a time when performance bonds are in increasingly short supply due to the workload boom and as large clients, including BAA and Network Rail, are trimming their framework lists.

The source said both factors could spark a period of concentration in the market, where consolidation among large companies will widen the gap between big and small. They said: “The rights issue means Costain will be able to win larger deals but it doesn’t make it a world player. Sooner or later it will have to bow to the inevitable.”

At the group’s interim results last week, chief executive Andrew Wyllie acknowledged the changing landscape. He said: “The company expects that consolidation within the UK construction market will continue and a small number of large firms will dominate the market.”

But a Costain spokesman dismissed takeover talk. He said: “We are focused on growth and now have the added financial strength to play a full part in the ‘premier league’ of contractors.”