Waiting for Balfour

At 5.37am last Wednesday, the final email was sent. The board members and their advisers in the companies, lightheaded with sleep deprivation and adrenalin, were ready to end two months of negotiations and weeks of market speculations by announcing to the stock exchange a deal that would be a landmark in the history of British contracting: Carillion was to make a £291m bid for Mowlem.

Carillion had booked a room at the Great Eastern Hotel in London’s Liverpool Street every day for the previous two weeks in anticipation of the announcement and subsequent analyst briefing. At last they had the chance to use it. By mid-morning John McDonough, Carillion’s chief executive, and Simon Vivian, Mowlem’s chief executive, were chatting jovially with dozens of analysts and journalists. Then, to complete the show there was the obligatory official photograph of the two shaking hands.

At the time that handshake seemed to signal a done deal, and a happy ending to the story of Mowlem, the contractor that had gone astray. Well, a lot has changed since then.

On Monday, Balfour Beatty entered the stage with a declaration that it was considering a counter-bid. And although Carillion’s offer has been recommended by the Mowlem board, the financial muscle of the UK’s largest contractor should not be underestimated. Strategically, either company would be a good fit for Mowlem, but culturally it’s a different story. And while the battle for Mowlem rumbles on, clients and subcontractors have their own concerns centred on conflicts of interest and lack of focus.

Simon Vivian (left) and John McDonagh …

The bids: Carillion vs Balfour Beatty

Both bids have strong points. Carillion has the support of the Mowlem board, whereas Balfour has more to offer Mowlem’s shareholders. There is a striking difference in the size of the two rivals. Balfour has a turnover of about £4bn compared with Carillion’s £2bn. It also has a market capitalisation of almost £1.5bn. However, Balfour has merely indicated that it might make an offer and is undertaking due diligence. Carillion has made a formal offer of 205p a share in cash and shares.

Carillion has support from investment bank Schroders and fund manager Aberforth Partners, which together own 17% of Mowlem’s shares. Schroders’ support of Carillion’s bid is binding irrespective of whether a rival bid emerges, whereas Aberforth is free to withdraw its backing if Mowlem receives an offer that is 10% higher than that of Carillion.

The deal is by no means a fait accompli. For one thing, there is room to improve on the present offer. According to analysts at Bridgewell Securities, an offer of up to 220p a share would be a reasonable price for Mowlem – but then they have not had the same access to its books as Carillion. There is also enough time for Balfour Beatty, or another company, to make a rival bid. There is speculation in the market that Balfour would be wiling to pay more than 218p a share. The terms of a deal have been agreed, but the offer prospectus is not expected to reach Mowlem shareholders before Christmas, and the deal would not close until the end of March, if all went to plan.

Mowlem is stuck in its ways and desperately needs to reinvent itself

Carillion source

Balfour also has the resources to make a cash offer, which would undoubtedly be preferable for most shareholders. And although Carillion says it could make £15m of savings a year by 2007, it is thought that Balfour could squeeze more.

Strategic fit

Strategically a Mowlem takeover would make sense for Carillion and Balfour. Both are interested in Mowlem’s regional construction and support services businesses, as well as its PFI portfolio.

An added attraction for Balfour would be Mowlem’s Australian business, which would sit well the former’s Asian rail and construction business.

“Mowlem is a pretty good fit for both companies,” says Howard Seymour, analyst at Bridgewell Securities. “But the caveat is twofold: has Mowlem genuinely got through its problems? And can Carillion or Balfour Beatty be sure they are not overpaying?”

Cultural fit

Although most acknowledge that strategically the Carillion deal is logical, some are sceptical about how good the deal is in cultural terms. One senior City source said: “Culturally, it is a terrible fit. Mowlem is a command-and-control, autocratic regime with layers of management like the Russian civil service. Carillion is much more autonomous and transparent. People are accountable and get rewarded.”

But Chris Girling, group finance director at Carillion, is understandably keen to emphasise that the two companies are well suited: “The cultural interface is pretty good. We all share the same perverse sense of humour,” he joked last Wednesday.

We are not working with Mowlem at the moment, and I’m very glad about that

Managing director of M&E subcontractor

But it will be interesting to see how that translates on the shop floor. According to a senior source at Carillion, McDonough has spent the past four years transforming the company into an innovative, prudent business capable of delivering sustained growth. This clashes with the perception within Carillion that Mowlem is an old-fashioned contractor “a bit like Tarmac was in the 1980s: a big company but stuck in its ways and desperately needing to reinvent itself”.

Sir John Gains, the former Mowlem chief executive, this week rejected claims that he oversaw an old-school management regime. “I basically grew a services company from scratch from a share price of 50p to £2.50 at its peak; I don’t think that makes me old school”.

Gains said that he did not know whether Carillion’s offer for Mowlem was a good one: “It’s very difficult for me to comment as I’m not close to the current Mowlem management, but when I left the company was in a healthy position. I’m not close enough to the market now to know whether this is the right move for Mowlem but the management obviously think it’s a good deal.”

In terms of cultural fit, Balfour Beatty is perhaps somewhere between Carillion and Mowlem. Chief executive Ian Tyler comes across as a conservative man, which would suit Mowlem, but Balfour is generally reckoned to bear the imprint of Mike Welton, Tyler’s more outgoing predecessor. However, the relationship between Balfour and Mowlem’s management has not been tested, whereas Carillion seems to have built up a rapport with Vivien’s team.

Implications for staff

The timing of the announcements means that the Christmas break will be an anxious time for Mowlem staff. Carillion’s Girling makes the point that redundancies are not going to be in the thousands, but some are expecting about 700 people to lose their jobs. The fact that this number would be less than 2% of the combined 40,000 workforce will be of little comfort for those affected.

As the purchaser, Carillion’s management is unlikely to lose out in any takeover. A source at the company said that its staff are seeing the deal as an opportunity: “Everybody here is of course tremendously excited by the prospect of the acquisition. It’s a bit early to be speculating about who will be working where, but everybody will want a slice of the pie. There will be big opportunities for senior people.”

And many in the market are predicting that most staff at Mowlem have little to worry about, either. McDonough himself last week said that one of Carillion’s biggest problems was staff shortages and that as a result few relatively Mowlem staff would face redundancy.

Mowlem is a pretty good fit for both companies but has it genuinely got through its problems?

Howard Seymour, analyst

Bridgewell’s Seymour said job losses were not a serious concern: “It is not a case of chopping people out, but of expanding what you’ve got and taking advantage of the synergies of bidding together.”

Clients, as well as staff, will be keeping a close eye on events as the drama unfolds (see “What do Mowlem’s clients think?”, left).

The Carillion insider said: “McDonough will be looking to reassure key customers and suppliers that it’s business as usual within Carillion and that Mowlem’s relationships with its key clients will continue.”

The view from the subcontractors

The reaction among Mowlem’s subcontractors will be interesting. On the one hand, there will be a sense of relief that a company in financial trouble looks set to be rescued – always good news for anyone wanting to get paid. But on the other, those that have built good relations with Mowlem but do not have ties with Carillion will feel under threat.

The managing director of one large M&E contractor says: “We are not working with Mowlem at the moment, and I’m very glad about that. We don’t want to be involved with a business that is unstable, and at the moment Mowlem does appear unstable.

“The way the executive boards of the companies concerned seem to be playing around with the deal is making clients and other contractors nervous. This whole process is damaging the company, and it will damage the company further if it goes on for a long time. There is less and less chance of it coming out in good shape, and so firms down the supply chain will be wary of signing deals with it.”

A senior source at engineer Halcrow, which is working with Mowlem and Carillion at the moment, says: “Our concern lies in the short term as takeover activity tends to divert companies and their top management from the real business of construction. The concern may be that one or other company could take its eye off the ball, particularly as another bidder is entering the fray.

“But we wouldn’t be concerned for our relationships with Mowlem or Carillion should they come together. There is synergy between the companies in their civil engineering, road and rail operations, and if they came together they would create a larger contractor which could rival Balfour Beatty. Maybe that’s why the latter is becoming interested.”

The drama looks set to unfold in the new year, and the late nights spent by the senior management at Carillion and Mowlem may not be over yet. Should Balfour Beatty come out with a counter bid, which was unclear as Building went to press, there is nothing to stop Carillion from raising the stakes higher. As most industry players wind down for the Christmas break, the powerhouses of UK construction are preparing for battle.