Amec - The reckoning

Sir Peter Mason’s final year at Amec should have put the finishing touches to a glorious career, and the cherry on top was to have been a grand farewell and hearty thanks for taking the company’s share price from less than one pound to more than three during his decade at the helm.

For much of that 10 years, Amec was the golden boy of British construction. It had the biggest turnover, and its mix of contracting and services work brought in attractive margins. As a result, Amec was one of the few construction sector firms that the City cared about.

Instead, the past 12 months have been characterised by losses, contract disputes and the almost certain carve-up of the most powerful empire in UK construction. When Mason leaves next month to become a non-executive director of the Olympic Delivery Authority, many will not look upon his final days fondly. In fact, the company now appears to be a shell of its former self, with one analyst concluding that the construction business might be worth only £1 and another describing it as “a mess”.

Just last week, some Amec middle managers were “fuming about Mason”, according to senior staff at a rival contractor. They had taken offence at comments he had made to the press in the aftermath of the company’s results to 30 June 2006, in which it reported a £58m loss.

Over the past year, Mason has admonished managers at the company’s construction division. He said: “It has not been well managed for the past three years. The people running the business were not following proper business processes and did not carry out proper tender reviews.” According to the source, the managers pointed out that Mason “must have forgotten the fact that he is chief executive” – the buck stopped with him.

The history of Amec’s slide began in November last year, when the company unveiled its Reshaping for Growth strategy.

The reshaping

There had been rumours of problems at Amec for months, but the City was taken aback when Reshaping for Growth made three announcements:

According to the source, the managers pointed out that Mason ‘must have forgotten the fact that he is chief executive’ – the buck stopped with him

• Amec was trying to sell the most valuable part of the company, the French services business Spie
• Plans were afoot to split the company into two quoted entities, one concentrating on UK infrastructure, the other on energy and process industries
• The company was to take a pre-tax hit of about £90m, or £70m after tax. To put this in context, Amec’s previous full-year pre-tax profit was £118m.

The company did not go into details about its losses, but did point out that they were the result of withdrawing from certain markets, such as US construction management, and contract disputes. It added that £30m of the total related to US and UK contracting.

Earlier this year, ABN Amro analyst Mark Howson claimed that all but £14m of the £90m was for contract write-offs, following a steer from Amec finance director Stuart Siddall. Tellingly, the company said at the time that it would “exit road building on a lump-sum basis”.

Road building has been a problem area, and Mason stated in his recent press briefing that it had lost money on two PFI contracts in the sector. One was the £245m A1(M) Darrington-Dishforth scheme in Yorkshire, where an Amec-led consortium won a 33-year upgrade and operate contract in 2003.

There have been suggestions that Amec could have lost as much as £13m on this scheme. More than a year ago, there was a problem with the pavement that underlies the road. Essentially, it was not strong enough and the aggregate used had to be replaced. This work is subject to an insurance claim, and one senior project source suggests that the hit might be less than £5m.

It is likely that the second roads contract, the £200m A13 PFI in east London, was the bigger burden. One source admitted that problems there have cost about £10m, but would not go into details. Also, Amec’s consortium partner KBR noted a £9m “impairment charge” on a UK joint-venture road project in July, which is believed to refer to the A13. The problems there included damage to the Limehouse Link tunnel last October when a bus caught fire.

The hits keep on coming

The strategy outlined in Reshaping for Growth has progressing this year, with the business separating into construction and energy divisions. A new chief executive, Samir Brikho, will replace Mason on 2 October and with his energy background at Swiss giant ABB, the break-up looks inevitable. And Spie was sold to PAI Partners for £707m, when many commentators thought it would fetch less than £500m.

But the contract hits kept on coming. In June, a further £65m post-tax writedown was announced and the impression grew that Amec had failed to price its contracts properly. Mason responded that two writedowns, £15m on a Middle East contract and £10m on construction work, reflected the firm’s conservative accounting policy and might be recoverable.

What surprised the City was Mason’s refusal to write off £7m on the £167m Colchester General Hospital PFI

The £15m seems likely to refer to the engineering, procurement and construction of an ethane project at the Berri gas plant in Saudi Arabia. In 2003, its construction was delayed by three months, adding about 6% to the price tag. If the figure does refer to that project, some analysts are dubious that the £15m is recoverable as negotiations over it have gone on for so long.

What surprised the City more was Mason’s refusal to write off £7m on the £167m Colchester General Hospital PFI. Amec was the preferred bidder but the Department of Health halted the project, leaving the contractor to pick up £7m in bid costs.

Mason responded that the Bates report on PFI in 1997 recommended that private sector bid costs be reimbursed should a project be cancelled at a late stage. However, ABN Amro’s Howson questioned the failure to write off the bid costs. Accounting rules state that a company needs to be “virtually certain” of receiving payment before accounting for it. In his report on Amec, Howson wrote: “In our view, the recovery of the £7m is subject to a successful conclusion of a £17m claim.”

Yet, Mason may be proved right. A leading DoH official confirmed this week that although there was no precedent in hospital projects for this type of reimbursement, it has happened on Ministry of Defence schemes.

Taking a bow

At the interim results two weeks ago, Mason admitted that he had been slow to react to the problems in the construction division. He cited areas that the company should not have been in, such as multistorey car parks and large residential schemes. These are almost certainly allusions to the Castlepoint car park in Bournemouth, where the roof collapsed leading to a hit of anything up to £6m, and a residential scheme in Manchester, which was underpriced and poorly designed.

Although Mason took the blame, that attack on his construction managers makes it clear which people he feels were not doing their jobs. Clearly, contracts were underpriced, and this led Mason and his top team to minimise the damage. He now says he does not foresee any more exceptional costs coming in. An Amec spokesman added: “We think we’ve taken a prudent position. All the likely outcomes are now covered.” But the image of the biggest, glossiest construction group in the UK has been tarnished – and it will be up to Mason’s successor to restore it.