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Contractors sink into danger zone as downturn hits

With profits and share prices tumbling, mainstream construction companies will need to be lean and fit to steer clear of predators

Business consolidation through mergers and acquisitions was once something associated with house building. That and making money.

Not any more. The nosediving share price of quoted house builders reflects the City’s fears about the sector. Shareholders of stricken firms may be hoping for bids but few of their quoted peers seem to be in any shape to make an approach.

Consolidation today is occurring more and more in mainstream contracting as both publicly quoted firms – Mowlem and Alfred McAlpine, for example – and private outfits – Hampshire firm Dean & Dyball springs to mind – are picked up by rivals; in these cases, by Carillion and Balfour Beatty.

There are some prospective deals – Taylor Wimpey selling off its construction arm, for example – that many see as simply inevitable. In recent years big names such as Birse and the aforementioned Mowlem
and Alfred McAlpine have been swallowed up.

The most renowned deal of all saw Laing Construction sold off for £1, but then Laing was a distressed seller and seemed prepared to accept almost anything to get it off its hands.

In a wry aside, John Dodds, the chief executive of Kier, which had a serious look at buying the business and had been prepared to stump up seven figures for it, recently said: “O’Rourke had a period of exclusivity but we’d heard he was offering £1. We thought that £1 million would be quite a lot on the back of that.”

Now figures from research group Plimsoll suggest that zero growth, sliding profits and increased debts have pushed a third of firms to a weakened financial position or worse.

Plimsoll says nearly 400 of the 2,000 construction firms given a health check by the company “need to change to survive”.

Plimsoll’s senior analyst on the project, David Pattison, says: “I think these figures just prove the point that we have all been aware of that a period of consolidation is long overdue. Bit by bit, weaker players will be removed from the market.”

Plimsoll adds that more than 500 companies might need to shed jobs. For some, around 30 per cent might have to be cut from the payroll.

Mr Pattison adds: “Those rated ‘in danger’ must put immediate
plans in place to start to trade their way out of problems by cutting costs, jobs and turning unprofitable work away.”

But statistics can mean different things to different people.

Over half of the firms in the survey have either improved their overall financial performance or are the best performing in the market. The same number has been given a rating of either ‘strong’ or ‘good’.

Mr Pattison reckons that, as well as demonstrating an ability to weather any significant and sustained downturn, these will gain in other ways.

He adds: “Those companies rated as ‘strong’ and ‘good’ offer some room for optimism. Benefiting from stronger business models and tighter financial management, these are ideally placed to benefit from the fallout in the market.”

Contractors are cash-rich and taking a punt on a rival doesn’t seem quite the task it appears in house building.

The plimsoll business barometer


Strong 954 The best performing in the market
Good 178 Improving overall financial performance
Mediocre 214 In transition, a make-or-break year
Caution 257 A weakening financial position
Danger 397 Need to change in order to survive

Source: Plimsoll

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