ANYONE wondering why Carillion was so keen to gain control of Mowlem earlier this year should look at the details of the MoD's Project Allenby/Connaught PPP contract awarded last week.
As preferred bidder, Mowlem had been in line for the £12 billion project for some time. Confirmation last week that Carillion, as its new parent, together with joint venture partners, had secured the project ? while no great surprise ? has underlined the growing significance of the defence market for the industry. The scale of the project is awesome. Army garrisons at Aldershot and across Salisbury Plain will be transformed with a £1.2 billion construction programme spread over 10 years and with a support services contract wor th £5.7 billion over 35 years.
For Carillion the project should prove lucrative. It will invest £60 million in equity and should receive some £9.5 billion in revenue over the lifetime of the contract. Working in joint venture, the group will undertake construction work worth around £100 million annually over coming years, on which analysts assume it will be aiming for margins of 5 to 6 per cent, before bidding costs. Meanwhile its half share of the huge £5.7 billion support services contract should help the group ease the pressure on margins, which the loss of some rail maintenance work has recently brought.
It will also reinforce the group's position in the defence-related PFI market.
Thanks to its acquisition of Mowlem, the group is also preferred bidder for the £1.1 billion Permanent Joint Headquarters for the MoD and the Royal School of Military Engineering, worth £1.5 billion. The group is also shortlisted for two Defence Training Review Packages, worth £5 billion apiece.
With Carillion's shares up 14 per cent so far this year, the stock market is recognising both the quality of earnings defence projects bring and how, with the timescales involved, it becomes all the harder for new entrants to break into the sector.