Housebuilding mergers: were the deals worth it?

After a period of noticeable consolidation in both construction and housebuilding, are those active acquirers regretting their eagerness to spend?

What’s going on? You might sometimes think that the business world is close to imploding as it seems that we have gloom-mongers on every corner. Their message is that in addition to the housebuilding collapse, UK construction companies will be the next to fall off the cliff.

Those who sign up to such received wisdom argue that the companies at most risk are those who made acquisitions in the past 12-18 months at prices that now look far too high. They would also suggest that anyone planning a merger or take-over offer in the near future should slap themselves on the head and put the idea into a dark corner marked ‘Do not disturb’.

The trouble with this is that once you start to check out the reality by talking to dealmakers, they don’t seem worried in the slightest.

Let’s start with Balfour Beatty as it has been leading UK construction from the front for the past three years.

Balfour went on the offensive two months ago with a £180m rights issue that some called a cheeky move. But the new shares were marketed at a discount of only 5% to the trading price at the time and even under those terms the offer was still oversubscribed.

One reason for the extra-cash-please, Stock Exchange move was that Balfour wanted more fire-power for further acquisitions and no sooner was the money in the pot than some of it was being spent: the firm used £60m within days to snap up a Californian construction management company called Barnhart.

Another serial company buyer, Garvis Snook, chief executive of rapidly growing Rok, is likewise unbowed.

"We’ve made 19 acquisitions, many of them in the last two years," he says. "I’m pleased with the latest crop. Tulloch still stands our as the most fabulous. Many are trading well while others, such as Avonside, are beginning to deliver."

The poorest of the 19 deals is proving to be Lemaleg, a company based in Wakefield. "It’s not as good as we thought, but then it’s tiny on the Rok scale overall."

Further growth

Current market uncertainties are having no effect on Rok’s desire for further growth. "Our model has been based on making two or three acquisitions a year," says Snook, "and we’ll carry one that way. The only difference is that companies will be a little cheaper in this present period.

"All our borrowing facilities are unsecured and are on good terms."

Imtech has built an annual turnover in the UK of £250m thanks to a string of recent deals. Jim Steele, chief executive and main dealmaker, mirrors Balfour and Rok, seeing the present climate as an opportunity to buy.

Steele proves his point by revealing that he is close to snapping up a further construction group, one with a £100m-a-year turnover. Do we get a name? "No way," he replies with a chuckle.

"I’m not interested in cheap acquisitions as I have no interest in trying to sort out messes," he adds. "Poorer quality firms are being offered at lower prices but for anything in the top quartile I still look to pay as much as before. We buy on a multiple of the company’s annual profits and that multiple remains unchanged."

Looking back over the past two years then, has Imtech been taken in? "No, everything has delivered on promise," Steele replies. "All the directors of acquired companies got their full earn-out bonus afterwards, thanks to the on-going performance of their business, and we like to see that."

Vinci’s flag also remains nailed to the ‘acquisitions wanted’ mast. Finance director Alec Comba says: "We’re still running the rule over people. As it’s more difficult to raise finance there should be fewer competitors when we do make a bid."

While the names selected so far have all been eager to push out the boat, there is evidence of increased nervousness elsewhere.

The accountancy group KPMG is reported to have laid off 70 employees in its ‘transaction services’ department which is the one that does due diligence ahead of deals being struck. Similarly at Grant Thornton there is said to be a slowdown in its corporate finance division.

But back to our own world of UK construction.

Ennstone, the aggregates player, has featured in numerous take-over deals recently, several of them in the US, so does executive chairman Vaughan McLeod now wish he’d sat on his hands, or perhaps paid less?

"I’ve no regrets," he replies. "Today we have an excellent set of trading assets and we own them. No, I’m not stopping buying in this climate. We see this as an opportunity thought for us. However 2007/2008 was always going to be a phase where we bed down what we’ve got and that means that we are focussing on sweating what we’ve already got.

"That said, I’d still like a few bolt-ons."

One construction observer singled out two well-known names as the firms most likely to be feeling the pinch as a result of recent deals: GB Building Solutions and Keepmoat.

GB’s finance director GB Michael Lethaby laughs at the news, calling it miss-information given that the management buyout of the company known until recently as Gleeson Building was achieved without the burden of costly debt.

"Our mbo was not leveraged with venture capital nor with borrowings from the bank," he points out. "We have no debt."

Market peaks

Keepmoat, the social housing specialist group, changed hands in August 2007 at the peak of the market when its founders, Dick Watson and Terry Bramhall, sold the group for £780m to the HBoS bank.

A six-strong management buy-in team arrived led by new chief executive David Blunt and finance director John Thirlwall.

Things were pretty hot last year and there was no end of interest in Keepmoat from private equity groups and numerous banks. By the final round, the three most serious contenders had tabled offers within £100m of each other.

Today Keepmoat is worth 40%-50% of its value a year ago, suggesting that £400m has simply evaporated.

So do Keepmoat’s buyers now regret their move? Their answer is ‘no’.

With clients calling for tighter financial safety when considering which contractor to put onto their shortlist, might Carillion be paying the price for its recent deals, moves which saw it snap up Mowlem and Alfred McAlpine in rapid succession?

One construction analyst certainly thinks so. "Three other contractors have announced that having a decent cash pile is important in winning work in both the public and private sectors going forward.

"Yet Carillion is carrying 1.8-times net debt to its EBITDA [a measure of anticipated profit]. So yes, the group has increased its capabilities but the question to be answered is will it retain the same win rate."

He said that after speaking to a few of Carillion’s clients privately, he understands that its lack of cash is already having an effect on this score.

"Carillion wants to be bracketed with the bigger service companies but it is the only one with a large pile of debt," he noted. "Skanska and Hochtief both have net cash, Balfour has a big pile of cash and Morgan Sindall also has net cash.

"Mitie has gone out of its way to say that having net cash is helpful to it in these difficult times."

For other firms, however, what he dubs as ‘"difficult times" might come with something of a golden lining. "There are better buying opportunities now than a year ago," he explains. "One reason is that venture capitalists have gone out of the market. Yes, now is the time to buy."

So will Galliford Try be among the nimble-footed? It proved to be an active force in recent times, winning itself the tag of "acquirer" while leaving other names such as Costain and Taylor Woodrow Construction sitting in the "aquiree" zone.

Andy Sturgess, head of Galliford’s £700m-a-year building division, has been one of Galliford’s top deal-making team, especially during its successful offer for Morrison Construction.

Being a hybrid though, with both construction and housebuilding operations, might its strategy have brought Galliford’s future aspirations to a grinding halt, given the state of the housebuilding sector?

Apparently not. Over the last four years, Galliford has set itself challenges on three fronts: to achieve 10% year-on-year organic growth of existing businesses; lift construction margins into the top quartile; and acquisitions.

"We have achieved all three,’ says Sturgess. "Right from when Greg Fitzgerald took over as chief executive we have worked on the basis that if acquisition opportunities present themselves we will look at them.

"As soon as people see you as an ‘acquirer’ you get more and more of what’s on offer coming across your desk. We don’t have a policy that says we must acquire every year, though, so we have turned down numerous offers on the ground that either they didn’t fit our culture or they didn’t fit our requirements.

"Nothing has changed. What is a good this week was good last week and will be good next week. We can’t change our base philosophy because of the state of the market. Plus, we are financially sound, with low gearing."

With the possibility of the present market offerign acquisition opportunities, who is out there who to take advantage?

Well Kier’s name has cropped up on this score, not just on one front but two.

One construction analyst sees it as the only potential buyer in the market for Costain while another thinks it will find Barratt’s current knock-down share price too hard to resist.

"Kier is 30% staff-owned and it has an entrepreneurial spirit," he explains. "If anyone has an opportunity in today’s market it is Kier."