Conquistadors in Kensington

For some time the European construction industry has been dominated by giant French contractors, but this is changing. While we were distracted by Vinci and Bouygues, the Spanish have launched an audacious invasion of the European market. British contractors in particular should be on their guard because firms like Ferrovial and ACS have their sights set on UK takeovers.

Building’s latest rankings of Euro contractors shows that seven Spanish contractors have made the top 30 and each has moved up the league since last year.

Nigel Shilton, a European construction analyst at Deloitte, says: “Spanish firms are far more aggressive. The Spanish market has slowed down so they’re looking further afield. They are experts in PPP so they’ll be looking at that sector, and there is a distinct possibility they will buy UK firms.”

Their targets will not be big “vanilla” contractors, though. Instead they will be after niche businesses with long-term income streams. This might mean specialists in PFI or M&E, or regional contractors.

Shilton says the Spanish firms tend to have strong balance sheets, so they are in good positions to make acquisitions. They also have an extra incentive for buying foreign companies: the Spanish government allows them to deduct 5% of the profits they make from companies they own abroad from their corporate tax bill. However, the debt crisis means that to raise funds they will have to show investors they are buying companies with strong and steady cash flows.

One firm in particular appears to pose the biggest threat to UK players: Ferrovial, which bought BAA in 2006. In our league, the firm has swept into sixth position.

Ferrovial now derives 45% of its global turnover of *12.4bn (£9.4bn) from the UK. It gained a foothold in the UK in 2003, when it took over support services group Amey. It looks likely to win some juicy UK projects this year, including much of the £9.5bn of work BAA is planning.

ACS, which owns contractor Dragados, is also making an impact in Europe. In our rankings, it has leaped into fourth position, pushing Skanska down to fifth. Its turnover has hit *14bn (£10.6bn), up 16% on last year.

ACS doesn’t have a UK office yet, but it already has two motorway projects on the go: the A1 Darrington-Dishforth and the A13 in the Thames Gateway. It also appears to be in the mood for acquisitions. It bought a 25% stake in Germany’s Hochtief in March 2007 for *1.25bn (£943m) and in December snapped up US firm Schiavone Construction for $150m (£76.2m).

Compared with French and Spanish firms, companies like Balfour Beatty and Carillion are conservative

Market Analyst

Then there is FCC, which moved up from 14 to 11 after raising its turnover by a third to *9.5bn (£7.2bn). Again, it does not have a UK office and it does not have a massive presence here, but there are signs this could change. It bought UK waste management firm Focsa in 1992, then WRG, another waste disposal company, in July 2006 for £1.4bn.

FFC sounds pretty serious about expanding. A spokesperson says that acquisitions were on the agenda over the next three years, and it was “open to possible UK investments”.

The Spanish may be gaining ground, but the French are still on top. In our ranking, Vinci is number one, with a turnover of *26bn (£19.7bn). It is still growing rapidly, having increased revenue by 11% over the past year. It, too, is eyeing up acquisitions in the UK and has just bought Stradform, a £45m-turnover Welsh contractor.

Vinci already owns Norwest Holt, which acquired another UK contractor, Worcestershire-based Weaver, in July 2007 for an undisclosed sum.

Bouygues is in second place, with a turnover of £19.3bn – but it is growing faster than Vinci, having increased sales 14.5% in the past year. It is bidding to build the international broadcast centre and main press centre for the 2012 Olympics. It has just snapped up Warings, a Portsmouth-based, £100m-turnover contractor and is believed to be considering a bid for Taylor Wimpey. A further three French companies have made it into the top 10.

So where does this leave British contractors? In contrast to the intrepid Spanish, UK firms look rather reserved. Our biggest player in Europe, Balfour Beatty, still has not broken into the top 10. Instead, it is exactly where it was last year – in 13th.

One analyst says: “Compared with Spanish and French firms, companies like Balfour Beatty and Carillion are conservative.” He reckons it is harder for UK contractors to break into foreign markets. “We seem to have much lower barriers to entry here in the UK, while Brits have struggled to break into France, Germany, Italy and Spain (see box, bellow).

Public sector projects throughout the EU are now, theoretically, open to UK companies but the analyst says that despite this, in countries such as France, the local players have the experience, contacts and scale built up over years. This is borne out by the example of Amec, which sold its French business, Spie, for £707m in May 2006. The move came amid financial losses and disputes that culminated in Amec exiting construction altogether in August 2007. Its regeneration business went to Morgan Sindall for £26m and the project investments business was sold to Land Securities Trillium for £164m.

Wolfgang Schlicht, head of project finance Europe at EC Harris, says UK firms can only break into Europe if they make acquistions: “Although it is French, Vinci is very successful in Germany because it bought German companies and entered the market early. This is the only way to break in, really.”