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Contracting is out

Over the last five years or so, the biggest contractors have slowly redefined themselves as construction service providers. Realising that mainstream competitive tendering is high risk and often unprofitable they have added new, more profitable, revenue streams like facilities management to their skills portfolios. Some, like Amey, have grown into these new areas so successfully that they are no longer considered contractors at all.

All the other construction giants have, to a degree, followed suit, adding FM divisions as well as moving into higher margin negotiated and private finance initiative work. But, unlike Amey, most have found it difficult to shake off the association with mainstream contracting.

As a result, their senior executives have a tough time trying to push their share prices up in the name of improved shareholder value.

John Laing has almost certainly encountered such problems. In recent years its profitable housing, property and infrastructure investment activities have been dragged down by loss making contracting.

The inevitable tensions between contracting and the rest of the group finally came to a head two weeks ago when John Laing announced that Laing Construction was up for sale. Construction will hope to attract buyers on its reputation for delivering well executed civil engineering projects like the Second Severn Crossing.

Sadly the division is more likely than not to be tainted by its association with the stunning but loss making Cardiff Millennium stadium which left a gaping black hole in the accounts a couple of years ago.

In theory, the logic behind the decision by John Laing to sell Construction looks good. Dump contracting and the rest of the group can flourish without the ball and chain of construction losses holding it back. Laing Construction chairman and John Laing plc director Jim Armstrong also claims the move will liberate contracting from cash restrictions imposed on it by the rest of the group.

But the timing of the move raises some serious questions.

Laing Construction is still making losses, which makes it an even less attractive proposition than most contractors.

The last major takeover of a national contractor was Skanska's move for (profitable) Kvaerner.

Laing claims that Construction is putting its losses behind it, having restructured its management and earmarked £15M for restructuring during the second half of this year. But the division has still to prove that it can make money. Until there is evidence that it can, it seems unlikely that it will attract much in the way of serious interest.

City analysts believe that Laing Construction has an uphill battle to shake off its reputation for picking up loss making work. One said last week that whoever puts in a bid will have to do an exceptional amount of due diligence to ensure there are no more Cardiff Millennium Stadium style skeletons lurking in the accounts. The feeling is that if Laing Construction had been profitable, bidders would be a little more relaxed about this. The question now is whether it will find a buyer at all.

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