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Tide of takeovers

Takeover fever seems to be gripping the industry. But, as Aaron Morby reports, not all construction companies are ready for friendly merger talks

JUST HOURS after Anglian Water revealed its hand as the mystery buyer for Scottish contractor Morrison, rumours began to circulate that another water company, Severn Trent, was on the hunt for a contractor.

The target being touted is Tilbury Douglas. But, like much of the wild speculation circulating in the last few weeks, it remains anyone's guess whether there is any real substance to these rumours.

Skanska's move on Kvaerner Construction caught everybody in the business by surprise, even the main contracting board.

Just days before this week's takeover, construction division directors were laughing off rumours of a friendly bid from the Swedish contracting giant.

These were fuelled by the notion that Kvaerner Construction did not fit in with the logic behind a hostile bid war being fought by Kvaerner Group and Aker Maritime to create the world's largest oil and gas service company.

As the news was released, Keith Clarke, president of Kvaerner Construction said: 'We have a shared strong focus on core business and Skanska's resources will be important.'

The UK business is to operate under the Skanska banner, with Mr Clarke staying on as head of the new company.

Claes Bjork, president of Skanska, said: 'This acquisition gives us a leading position in the UK and also a significant presence in several Asian markets. I regard it as very important for Skanska's continued development.'

Put this with last week's news that Anglian is buying Morrison and Try has agreed to merge with Galliford to create a top 25-ranked contractor, and it is not surprising that takeover fever has gripped the construction industry.

Behind the Try-Galliford merger is a philosophy that increased scale and some overhead savings will help them with bigger clients.

George Marsh, Galliford deputy chief executive, said that he believed there was a place in the UK for a good-sized regional contractor.

The resulting bigger stock market capitalisation will also attract more interest from the City investment community, which is largely indifferent to small public contracting companies.

It is a deal that also effectively draws to a close the family involvement in two long-established traditional contracting companies.

Anglian's move on Morrison will see another famous construction family handing over control This must rank as one of the industry's best kept secrets. Under the deal, Sir Fraser Morrison will take up an advisory role as nonexecutive director on the water company's main board.

Morrison's staff were as stunned as everybody else. Most thought they were destined for Sweden's Skanska or even acquisitive engineering group W S Atkins.

An employee said 'We were all really shocked by the news, because there had been strong rumours surrounding Skanska.'

A rival contracting boss said: 'Nobody saw this coming. There are a few companies I thought may be interested in Morrison, but a water company was a surprise. It does look like a very good deal for the Morrison shareholders.'

While the deal looks a long way from the consolidation that many hope for, it may have the same effect.

'I can't see Anglian running Morrison as a construction firm in the same way as Fraser Morrison ran it, ' he said. 'Calling it an asset management company means less mainstream competition.'

At first sight the deal is nothing more that a resurrection of an old idea.

Just after water privatisation many water companies invested heavily in construction businesses to circumvent the straightjacket imposed on water profits by the industry regulator.

Contractors proved attractive targets because they could advise on big infrastructure investment programmes.

This turned out to be flawed thinking, because most water companies were ill-informed about the big risks and low margins in contracting.

Now even the giant vertically integrated French water companies like Generale Des Eaux are looking to keep their contractors at arm's length or spin them off altogether.

But Chris Mellor, Anglian chief executive, who is considered to be one of the industry's more enlightened thinkers, has a different approach and wants Morrison for its asset management and PFI expertise.

'In the UK water sector, outsourcing has only just begun, ' he said.

'As water companies concentrate on fewer activities, there will be opportunities for groups like ours to construct, operate and maintain a wide variety of assets.

Sir Fraser Morrison described the move as a 'quantum' leap in the development of Morrison.

'I am confident that the combined business will be a market leader in the creation and management of assets in utilities, transport and property sectors.'

Anglian first signalled its ambition to be a broader asset management company by joining the LINC consortium, bidding for the infrastructure contracts of London Underground.

Mr Mellor also hopes Morrison, which proudly boasts the industry's highest margins, will bring a talent for raising efficiency to both core water infrastructure spending and its international operations, which stretch from the Czech Republic to China.

But being owned by a water company is likely to have downsides.

The influential Financial Times Lex column gave the merger the thumbsdown saying the £262.5 million price tag destroyed value.

Morrison may also find it difficult to clinch work with rival water companies.

In spite of this, recent events have got everybody thinking.

A big private contractor is understood to be courting interest in the City.

And even the owners of smaller contractors are being tempted to entertain expansion plans or look for an exit.

As one contractor put it: 'Money is cheap and there are a lot of people out there who are falling over themselves to lend it to you.'

Another spur to corporate merger and acquisition activity is a marketplace where medium-sized publicly listed contractors are looking decidely cheap compared to earnings and assets.The big continental players have spotted this.

The problem is the big UK players have little appetite for this. Historically, UK majors only responded to the attention of big European contractors when they had run into serious cash problems. Conversely, UK majors are rightly cautious about launching their own mega-mergers, preferring bitesized acquisitions.

Alastair Stewart, European construction analyst at Fleming, said: 'Companies rise and fall on the back of good or bad acquisitions. If you get it wrong it can take years to recover - and not all takeovers have been successful.'

Notable disasters include Dutch contractor HBG's deal to buy Germany's Wayss & Freytag. This almost doubled turnover at a stroke, but it cost HBG dearly when a number of skeletons were found in the property side.

Kvaerner's purchase of Trafalgar House, itself a consolation for a failed hostile bid for Amec, helped precipitate a financial crisis at the giant shipping and engineering group.

So it is not without good reason that major contractors remain wary. At present Amec is Britain's best hope of a home-grown heavyweight because the group is expected to take control of its French contractor Spie by 2002.

But the rest of the majors are acting cautiously.

Quite a different picture to Continental Europe where the big players like Bouygues, Vinci (formerly SGE), Hochtief and Skanska are happy to risk the uncertainties of big multi-million take-overs in the race to establish themselves as global players.

This gives Continental giants the size and balance sheet that allows them take the inevitable multi-million pound hit on a big project in their stride.

Also, it allows them to bid for the mega-projects worldwide, which can offer very big returns.

In the UK, the emphasis on smaller bolt-on acquisitions in key services markets is proving a good strategy for raising profitablity.

But it is a strategy that is failing to create the big players able to compete on the world stage like French construction group Vinci, which will shortly claim a turnover of £10 billion if its merger with GTM proceeds.

Any downturn or increased competition in the newly-discovered services sector would leave many UK majors vulnerable to approaches from these big continental and global players.