Where next?

You would think that if anyone could see their own redundancy coming it would be the HR director. Not Alan Kitto, who headed that department at Stradform, a Cardiff contractor that was bought by Vinci subsidiary Norwest Holst for a reported £7m in December last year.

According to one source close to the deal, Kitto thought everything was “hunky-dory” on Monday 21 January this year, days after the ink had dried on the deal. On Tuesday he was clearing his desk, as was Martin Vaughan, the company’s construction director for Bristol, and five board members of Fifehead, Stradform’s parent.

Kitto is unlikely to be the last casualty at a regional contractor in 2008.

Of course, takeovers do not automatically result in redundancies, but the £75m-turnover business, which employed 200 staff, is the latest in a wave of regional contractors to be snapped up by larger players. Take Balfour Beatty’s £52m takeover of Bristol-based Cowlin in August, ISG’s £13m takeover of Bristol contractor Pearce in November and Bouygues’ £30m purchase of Portsmouth contractor Warings in December.

There is clearly something going on here other than baby-boomer bosses deciding it is time to cash in and buy a retirement home in Spain. In fact, the wave of acquisitions started after Labour’s second term began in 2001, when it began its huge spending programmes on schools, hospitals and affordable housing. Resources at the larger contractors were spread more thinly as a result, prompting acquisition-led growth to plug the gaps.

More recently, the sophisticated demands of clients have driven the trend. They increasingly seek complex project management skills as part of a contractor’s package. Mid-sized players can struggle to meet these expectations, so when a big contractor comes knocking, moving under its umbrella can seem attractive.

Mike Peasland, group managing director of Balfour Beatty, explains the change from the point of view of Britain’s biggest contractor: “The introduction of PFI meant our average project value rose from £3m to £12m. When we shifted our focus onto bigger jobs we left a void behind. That was the reason why Mansell [a national contractor bought for £42m in December 2003] could capture the regional market of £1-5m projects.”

Matt Bray, senior practice manager at construction recruitment specialist MRG, says another attraction is that regionals enjoy a steady stream of work. “Large groups will only win one in every five massive jobs, but a mid-sized regional player on a local authority framework has 60-70% of its work guaranteed from the framework, which is an attractive flow of cash to the big boys.”

Peasland agrees that regional contracting is “less spiky”, but Balfour Beatty is hardly in desperate need of cash. Another reason driving its acquisition trail, suggests one observer, is shareholder pressure: “Balfour is focused on mopping up regional contractors because it is sitting on a huge pile of cash and shareholders are crying out for it to do something with it. Its first option is share buybacks or to return it as shareholder dividends. The second option is to invest it in new businesses. Leaving it to sit on the balance sheet is not an option.”

There’s little doubt that there will still be easy pickings in the future – be they good ones or bad ones

Kevin Cammack, Kaupthing

It’s a suggestion that Peasland rejects. “There’s no pressure to spend the cash. We’re spending it and we keep replenishing it. It’s better than being in a position of having to raise the cash through a rights issue.”

As for the notion of a client-driven change, Alastair Stewart, an analyst at Dresdner Kleinwort, believes rising demands will result in one regional contractor being bought every six months. He says: “More and more clients are looking for a range of project management, facilities management and funding services, which is unfortunate for the regional groups.

“These regional companies are smart operators with formidable local knowledge, but to get involved in PFI at their size is a problem. Then you look at a big company with a strong balance sheet, huge PFI intellectual capital at head office and the answer is logical.”

There are other advantages for national contractors apart from the steady flow of cash, says Kevin Cammack, an analyst at Kaupthing. “The big boys can feed smaller companies into larger clients such as BAA for example. It’s being driven from all sides. Some want niche players and will pay for the skills, others want to grow quicker with the extra client base.”

And he argues that the integration process is not complicated. “Smaller regional players are quite an easy fit, so if you have four or five it makes sense to have seven or eight.

“There’s little doubt that there will still be easy pickings in the future – be they good ones or the bad ones that have got into trouble as a result of the credit crunch and will get mopped up anyway.”

The trend has also been driven by regional players facing growing pains of their own as the government building programme kicks in at a local level.

David Lawther, chief executive of fit-out specialist ISG, says regional players can reach a critical mass after which point it makes sense to look around for suitors. ISG bought Propencity for £12.5m in September 2005. The group included northern contractor Totty, east of England contractor Jackson and fit-out specialist Dean & Bowes.

“They grow until they reach a stage when it becomes operationally difficult to take the next step. To make that happen requires investment and process systems on another scale.”

As £150m companies, it is likely regional firms will implode if they try to carry on

Mike Peasland, Balfour Beatty

Peasland agrees. “A lot of regional companies have gone from being quite small to taking on work in affordable housing, owing to government expansion. They have moved rapidly from being £30-40m to £150m companies. At that level it is likely they will implode if they try to carry on.”

But why did £23bn-turnover Vinci bother with the relatively tiny Stradform? Cammack says that companies such as Vinci’s great rival Bouygues, German firm Hochtief and Sweden’s Skanska are pitching at a smaller end of the market than the likes of Carillion and Laing O’Rourke because they have a different mindset.

“Maybe they have learned from the mistakes made by British companies in the nineties, which went over to Europe not realising that construction markets were quite local. It’s part of the foreign mindset whereby you build a far better business by buying a local firm and building up slowly. You can win trophy projects but for the long term, you have to start at the bottom. Look at the problems Multiplex had with Wembley”

A source close to Bouygues says the company drew up a hit list of 100 UK firms early last year. It is understood now to be in serious dialogue with two or three of these. The source says: “These are companies of more than £100m turnover but certain things have to happen in terms of their balance sheets and settling claims before Bouygues will take it any further. Bouygues is an absolutely meticulous operator.”

Making sure the deal works once the papers have been signed is another matter altogether. Garvis Snook, chief executive at Rok, the self-titled “nation’s local builder”, knows more than most about how to handle takeovers. His £683m-turnover company has bought 17 companies in the past eight years, ranging in price from £1m to £32m. So how does he make sure the integration process does not disrupt business or morale? “Communicate, communicate and communicate until you puke.”

The staff attrition rate at Rok in the 12 months after a takeover can vary between 5% and 20% depending on how on board the local leadership is. “It’s like going dancing. You have to try out various partners and get to know each other first so that when you propose you know it will work.” He believes the economic downturn could make the next few months a good time to buy.

A source close to Balfour Beatty’s Cowlin deal says the move from family company to plc was a largely painless deal. “There were some who found the Big Brother thing overbearing and left but most said it had secured their workload and brought the company into the 21st century.”

“Uncertainty is the biggest killer in these deals, though,” he says. A fact Alan Kitto would agree with.