H1.10: Consolidation in construction

A special report in association with Hill Dickinson, The Co-operative Bank, Morris & Spottiswood and Emplacement

With building activity set to contract further following severe government spending cuts and the private market yet to thaw, is takeover an option for struggling contractors?

"First of all the private sector contracted and now the public sector is doing the same," says Michael Magnay a director in corporate finance reorganisation services at Deloitte in Manchester. "The confidence of CFOs [chief financial officers] in companies to make any moves in terms of mergers or acquisitions with the risk of a double dip looming has been severely eroded."

The focus among his clients in construction remains firmly on cost control, says Magnay, before contemplating buying rivals. There is also a huge restriction on the availability of funding for mergers and acquisitions, as there is in all areas of the private sectors.

Meanwhile the business model is moving away from one-off jobs towards longer-term relationships. "The emerging model for construction is all about maintenance contracts," adds Magnay. However, these tend to be more in-house with staff often transferring to public or quasi-public clients such as Registered Social Landlords and complex agreements where risk and reward is split between partners, adding to the difficulty of valuing firms in this area.

In addition, the closure of future pipelines for all but the luckiest schools, hospitals and universities is likely to mean more price pressure as refurbishment budgets are stretched to their maximum and ever more ambitious service agreements.

Magnay predicts we will see more joint ventures as the UK comes out of the recession, driven by the greater security they offer both sides.

He adds: "A joint venture can be the start of a future takeover, with parties getting access to the JV partners assets and effectively using the collaboration as a prolonged period of due diligence."

Advisors agree there will be more casualties in construction as firms fail to adapt and fall in the next six months.

Matt Dunham, construction partner at Grant Thornton in Manchester, adds: "The biggest problem is often among the small and medium sized sector where they are reluctant to see what is good for the business. Owner-managers find it harder psychologically to take advice."

Dunham believes if a restructuring advisor gets into a client's books six months earlier there is a ten times better chance of saving the business. Six months later and there is more chance of finding critical disputes with suppliers, cheques bouncing, working capital not working properly and banks losing patience."

Trying to help at that coalface is the sector support service, the Centre for Construction Innovation North West. Andrew Thomas, chief executive of CCI NW, explains: "CCI is working hard to maintain the competitiveness of the supply chain to make it a more robust animal. This could manifest itself in accreditation, bid coaching, how to express their strengths and hopefully win more work. Managing energy consumption and waste minimisation means they can be more efficient. We also look at demystifying terms around the subject of zero carbon, which they maybe hear but don't get.

"We have also helped devise the new regional frameworks, being led by Manchester City Council, which are creating an artery for quality-assured procurement and will be very valuable to those companies that make it onto the list."

While Thomas agrees there will be more casualties, he is more optimisitic about the chances of consolidation. "We are already seeing SMEs coming together to form consortia to increase their competitiveness. The larger end of the market has seen consolidation, with Balfour Beatty buying Birse Civils as it was on lots of frameworks and undervalued, and Morgan Sindall buying Amec."

Hopefully, those contractors that are struggling can get to the right advice in the right time.