Industry set for a year of consolidation

City analysts are predicting that several small, listed contractors will either be snapped up or exit the stock market this year.

Contractors Birse, YJL and Try Group were cited as prime candidates. Analysts say investor sentiment for small construction companies is now so weak that many would consider coming off the stock market. Such companies are also vulnerable to takeover by larger players because their share prices consistently underperform. “There is simply no place in the public arena for a small contracting business,” said one analyst.

Clients are also becoming increasingly shy of smaller companies. A Building survey revealed that nearly two out of three clients expect to use fewer contractors and reduce the number of contractors on tender lists in future. “The message to the smaller players is get specialised or you will be fighting over the leftovers and working for clients who want one building every five years,” said Alastair Stewart of Flemings Securities.

However, analysts are also predicting consolidation at the top end of the sector, with contractors such as Carillion and Jarvis vulnerable to takeover, possibly from foreign suitors such as Bouygues and Skanska. “The spate of corporate activity in the building materials sector has shown contractors that the markets like consolidation,” said Mike Betts of JP Morgan.

He added: “UK contractors are way behind their European rivals in terms of size, and yet a strong balance sheet is important these days, both for bonding capability and for equity investment in private finance initiative projects.”

Betts said merging two companies can be a quick way to cut overheads. “Our research showed that mergers can reduce overheads by 1-1.5%,” he said. He added: “A key move has been Laing’s decision to cut its overheads to 3.5% of turnover. Everyone is under pressure to do the same.”