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Buying into consolidation

House builders have been making the headlines this year with a series of mammoth deals, but do the UK’s contractors have the same acquisitive appetite?

The word ‘consolidation’ has been bandied about the construction industry quite a lot over the past 12 months, as mergers and acquisition activity caught the attention of not just the trade press but the mainstream national as well. It happened in the house building sector where the tie-up between George Wimpey and Taylor Woodrow – creating a £6.7 billion business in one of the biggest sales in the industry’s history – followed other major deals such as Barratt snapping up Wilson Bowden for £2.2 billion and Galliford Try’s £250 million swoop on Linden Homes.

In the materials sector HeidelbergCement’s purchase of Hanson created the second largest cement and building materials firm in the world. Indian steel giant Tata took out Corus following a pitched battle against Brazilian rival CSN and we wait with bated breath to find out which of the many buyers will pick up Tarmac after parent company Anglo American hung the ‘for sale’ sign on the business last month.

Yet, while these deals may have grabbed the broadsheet headlines, less attention has been paid to the prospect of consolidation in the construction contracting sector. Perhaps the reason for this is cynicism – after being told year after year to expect consolidation among the nation’s contractors many people in the industry may have stopped believing it when the evidence failed to -materialise.

For every major merger or acquisition that suggested consolidation, there was a smaller contractor making the jump up to the top table to keep the top end of the contracting sector as fragmented as ever. In fact, the general trend in terms of the number of large firms (those employing more than 1,200 people) from the mid-1990s into the first few years of the new century seemed to be that they were increasing in number rather than reducing through consolidation.

But are we seeing the first definitive signs that this situation is reversing? According to Government statistics in both 2004 and 2005 the number of large firms dropped. Whilst there had been one previous drop in numbers, in 2000, that had happened at a time when the total number of private firms of all sizes also dropped and the amount of work available to the larger firms had plummeted. Certainly at no point in this 10-year period has the industry seen back-to-back falls in the number of these major players.

But do these statistics in any way reflect consolidation in the real world of construction? Anyone who has been watching the contracting sector over the past few years will have been able to see the evidence that it is with their own eyes.

Carillion took out Mowlem in early 2006 and since then there has been a wave of activity. Most active have been Rok, which has taken out a series of firms including Sol and Tulloch; Galliford Try, which preceded the Linden Homes deal by gobbling up Morrison’s construction division; and Morgan Sindall’s double buy of Gleeson MCL and Amec’s construction businesses. Skanska also grabbed McNicholas plc during this time.
But the undisputed leader when it comes to such activity is also the biggest fish in the pond. Since it completed its acquisition of Mansell in early 2004 Balfour Beatty has seemingly made a commitment to an acquisition of a business a year in the UK to complement its current activities, either adding to its regional or subcontracting capability. Pennine was brought alongside the firm’s Stent piling operation in 2005 while buying Birse improved its regional civil engineering operations in 2006. Even as this supplement was being put together, the announcement came through that Cowlin had been snapped up to augment Balfour Beatty’s offering in the south and south-west.

So is this really the first definitive sign of true consolidation in the contracting sector? The Government’s next construction statistic annual is due to be published this month and should show whether the year-on-year drop in the number of large firms seen recently has continued. If activity among the major players is anything to go by, it seems sure this will be the case.