Europe’s big beasts: Top contractors on the prowl

Big business is seldom a cheerleader for big government, but over the past two years Europe’s biggest contractors have had a lot to thank the state for.  

Government “stimulus packages” intended to prop up demand in their national economies have been the single biggest factor in keeping construction companies in the black as the global recession tightened its grip.  

Speaking in August, Martin Bouygues, the chairman and chief executive of Europe’s second biggest contractor, said: “The effect of the stimulus package voted by the Obama administration is already being felt. We have been feeling these effects as early as the second quarter 2009, not just in terms of calls for bids but also in actual business, actual deals.” And six weeks ago, Herbert Lütkestratkötter, the chief executive of Hochtief, Europ’s third largest contractor, said he expected economic stimulus programmes to make a “significant impact” during 2010. 

The dissenting voice among the largest firms belonged to Xavier Huillard, chairman and chief executive of Vinci, Europe’s largest contractor. He expressed the opinion a few months ago that stimulus packages were unlikely to prevent further deterioration in Europe’s construction sector in 2010.

Huillard does have evidence to back up his opinion: margins at Europe’s biggest contractors have taken a hammering in the past year, and most majors are expecting to post flat profits for 2009. For example, the construction division at Vinci accounted for 47% of the group’s revenues in 2008, but contributed 32% of its profits. This is largely attributable to the decline in private sector work and the desire of governments with reduced tax revenues to get better value for their money.

It is also worth pointing out that the kind of infrastructure contracts at the heart of stimulus programmes – roads, bridges and other infrastructure – are still largely let through competitive tendering, particularly in the US market, which usually results in slimmer margins for the winning firm. “Infrastructure projects are structured that way in the US,” says Andrew McNaughton, Balfour Beatty’s chief operating officer. “That’s the environment they work in there.” He added that Balfour avoids cut-throat bidding contests: “We don’t entertain lower bids as a way of doing things.” 

There have also been concerns among Europe’s giants that the stimulus packages in Europe are taking too long to become shovel-ready compared with Barack Obama’s three-year, $140bn (£87bn) programme. “The stimulus programme has been much more visible in the US,” says Andy Brown, an analyst with stockbroker Panmure Gordon. “It’s been slower to come through in Europe.”

But most of Europe’s large contractors expect to receive a boost from government spending this year. “Within Europe, approvals for expenditure started to come through at the end of last year so we should see a benefit in 2010,” says McNaughton.

The German system

In Germany, Europe’s largest economy, thousands of SMEs have taken advantage of an initiative aimed at providing work for them while making Germany’s homes more energy efficient.

“The stimulus packages are the single biggest factor in keeping Germany’s construction sector going,” insists Heinrich Weitz, market analyst at the German contractors association Hauptverband der Deutschen Bauindustrie. “Overall the industry declined 4% last year but without increased government spending on infrastructure and energy-efficiency programmes, the decline would have been much worse. But it is businesses with 20 or fewer employees that have been the biggest beneficiaries.” 

Over the past two years the German government has provided about €8bn (£7.2bn) a year to offset the cost of installing energy-efficient windows, doors, heating systems and roof and wall insulation. The move resulted in the installation of about €17bn (£15.3bn) worth of energy-efficient products last year. “Thanks to government incentives, making homes energy efficient has now become a core market for small builders. This kind of work accounts for two-thirds of turnover for many smaller firms,” says Weitz.

Who came where?

Looking at the Top 200 contractors and housebuilders league tables (pages 36-41), which are based on financial results from 2008, it is a case of the usual suspects, with Paris-based Vinci once again in pole position, posting a bumper €33bn worth of work, up more than 10% on 2007. Vinci’s cross town rival, Bouygues, once again took the second slot.  

Balfour Beatty fell out of the top 10, and British firms overall made a slightly poorer showing than in 2007 accounting for 26 of the top 100, including housebuilders, as opposed to 29 in 2007.

Despite the parlous state of the Spanish economy, Spain’s contractors once again occupy three of the top 10 slots. Christine Le Forestier, economics official at the European Construction Industry Federation, says the continuing strength of Spanish contractors is the result of their success in overseas markets and diversification into energy and other infrastructure services. “Most top Spanish contractors make more than 50% of their turnover from their international markets and other activities – that is why the domestic crisis did not hit them too strongly,” she says.

Spain’s largest contractor, Actividades de Constructión y Servicios (ACS), is run by Florentino Pérez, Real Madrid’s flamboyant president, who is best known as the man who brought David Beckham and more recently Cristiano Ronaldo to Spain. The firm continues to benefit from infrastructure work in Spain but has rapidly increased its overseas footprint in recent years. In 2003 international work represented 14% of ACS’ turnover. Today it accounts for 27%.

ACS also holds a large stake in Hochtief and speculation is rife that it will launch a bid for its larger rival this year. Hochtief’s share price improved during 2009 but remains almost half its value at the beginning of 2008. 

Looking ahead, China looks set to continue to be a big market for Europe’s largest contractors, with Balfour’s McNaughton singling out Hong Kong as a target market. He adds that firms may encounter more competition in Asia as domestic contractors return home from the slowing Middle East market.

And despite the raft of obituaries about the Gulf economies, continuing population growth in the Middle East and the region’s need for infrastructure are likely to continue to attract contractors’ interest. “The Middle East isn’t dead,” says McNaughton. “We’re still winning work in Dubai and the wider region looks good in the medium term.”

Panmure’s Brown adds: “Dubai clearly has issues, but in terms of energy-backed states, Qatar and Oman still need to invest in infrastructure, and Saudi Arabia has huge potential, although it’s probably a few years away from being a big market for contractors.” 

 But in all markets, the focus of work will remain fixed on government infrastructure spending, and with that comes a huge caveat. “The action of governments in the past year has left massive deficits and that has raised the question of how much longer this kind of spending can continue,” says Brown. “There’ll be an election in June at the latest and we won’t know until then how future spending will be addressed.”