Osborne Comments on Kier and Mouchel – ‘An Understandable Attraction.’

Osborne Chief Executive, David Fison, spoke to Infrastructure Intelligence this week and gave market insight about the possible match making of Kier and Mouchel, as takeover talks swirl round the industry.

With the option for takeover coming as a surprise to no-one, Kier’s new chief executive in Haydn Mursell who took over from Paul Sheffield at the end of June. He is on record as wanting double digit growth for the business in the next five years; something that is really only possible through takeovers.

And Mouchel effectively put itself on the market when it hired Rothschild in the summer to sound out the possibility of refloating the firm after a spectacular turn around under CEO Grant Rumbles.

Kier itself is doing well at the moment, revenues are up 51% to £3bn following the acquisition of May Gurney and underlying pretax profit was up 54% to £73.1M. The company earned over half its revenue in construction with a margin of 2.1%. But tellingly just over 30% of its revenues came through its services division with a margin more than twice that of construction of 4.8%.

A services business like Mouchel with strong presence in the highways sector  and maintaining around 30% of the Highways Agency network just as the £15bn English roads bonanza is about to kick in has obvious appeal. Along with that there are solid contracts overseas in the Middle East and Australia. And, with quality personnel becoming high value currency in a skills shortage, Mouchel’s 6,500 strong expert staff have their own glamour.

As Kier said in its statement confirming that preliminary discusssions had been held with Mouchel, “there can be no certainty that an acquisition of Mouchel will be completed.”

But clearly the attraction is there. And Kier cannot be completely immune from all the challenges currently afflicting other UK contractors, with Mouchel potentially offering an interesting change of emphasis, creating less reliance on the stormy waters of contracting.

According to Osborne chief executive David Fison who has a reliable reputation as a commentator on the world contracting, the UK’s major contractors are currently having a bit of a nightmare.

“It’s a perfect storm,” he says. “We’ve just had a recession that went on twice as long as anyone can remember and how does a contractor behave in a recession – it shifts as much money into its back pocket as possible via fixed price jobs. Then it consumes money trying to keep the business alive and hang on to critical mass so it can ramp up again when the recession is over. But that takes cash and there will always be the odd bad job.

“Then we had a sudden upturn when no one predicted it, accompanied by an uplift in prices for materials and services just when most of the jobs on the books were fixed price.

“Add to that the push for prompt payment and project bank accounts and the cash positive state the contractors need so they can trade at low margins disappeared. Nil interest from the banks added to the problem. What it means though is you can’t work at 2.5 or 3% margins. They have to be pushed up somehow.

“Shortage of people just adds to the issues,” he said. “The industry lost around 350,000 in the recession and we are going to lose a similar number over the next five years as the aging workforce retires. 20,000 apprentices are not going to solve the problem; technology eventually will, but not in the next few months. Which all means the price of labour is going up; so you have a perfect storm.”

Against this background Kier’s interest in Mouchel seems like common sense and the sector will be watching with interest how events unfold.

As an aside that same perfect storm is also an underlying reason for Balfour Beatty’s quick rejection as “undervalued” of John Laing Infrastructure Fund’s £1.05bn offer to buy its PPP assets last week. Having just offloaded Parsons Brinckerhoff which provided a third of its profits, loss of PPP revenues would not be attractive to Balfour Beatty.

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