The need for greater financial clout was Costain’s driving force behind its proposed merger with May Gurney, chief executive Andrew Wyllie has explained.
The all-share merger would see Costain shareholders owning 53% and May Gurney shareholders owning 47% of Costain May Gurney.
The combined firm would have revenues of around £1.6bn, a forward order book of around £3.9bn and a market capitalisation of £378M, based on the firm’s share prices before the proposed merger was announced.
“We have talked repeatedly about what our customers want, and they are all, in our view, consolidating their supply chains and looking to work with a smaller number of tier one contractors who can offer a wider range of services,” Wyllie told NCE.
“It is incumbent on us, therefore, in wanting to be a tier one supplier, to provide that,” he said. “We need to be able to take an idea, move it through some sort of [design and construction] process, and then maintain it.”
To be able to do this, Wyllie believes Costain must be able to demonstrate to clients that it can tick five key boxes. It must be able to prove that it can offer a range of innovative services; has skilled and experienced teams; has financial strength; has a proven track record of delivery; and has a strong brand reputation.
He said May Gurney would embellish all those criteria, but specifically would add to Costain’s financial strength.
However, he stressed that it was not just about financial strength. “It’s a people services business. The people assets are hugely important,” he said. The combined firm will employ over 10,000 people. Costain currently has around 4,000 employees with May Gurney at around 6,000.
Wyllie also insisted that adding May Gurney would boost Costain’s brand. “We are combining two businesses with a very strong brand,” he said. “May Gurney is a British business with a long history.”
Wyllie also stressed that the merger would not dilute Costain’s impressive list of key clients, but admitted there would have to be some reassessment of May Gurney’s client list. A key part of Costain’s strategy is to work with a specifically limited set of key clients in its core market of nationally critical infrastructure, which offer repeat orders. These include UK clients such as Crossrail, Network Rail, Eon, and National Grid but also global giants such as Eni, ConocoPhillips and GDF Suez. May Gurney’s clients list is largely formed of local authorities. Both firms boast UK water companies as clients.
“What we will have is a pretty high quality list of clients, the vast majority of which are placing repeat order work, and whose combined spend is well over £40bn this year,” he said.
“So at one level, that they are spending so much money is a nice problem to have. We may have to prioritise our business development effort for the good of the Group, but that is a nice problem to have.”
Importantly, because no cash is changing hands in the transaction, Costain’s cash-rich position will effectively be retained, despite May Gurney’s debt. Costain’s net cash stood at £105.7M as of 31 December 2012. The merger will see it swallow £40M in “transaction and integration costs” and take on May Gurney’s net debt of £77M as of 30 September 2012, but £74M of this is in the form of finance leases.
“After the merger we will have a modest debt position,” confirmed Costain finance director Tony Bickerstaff. “But it’s asset-backed which is good.
“There is no change regarding our cash position. No money has left the business.”
This cash-rich position will allow it to continue to fund future acquisitions.
It also ensures that it can continue to demonstrate to clients that it has the secure financial footing to meet tender requirements.
Had Costain attempted to buy May Gurney outright it would have lost this ability by being forced into a net debt situation.
Wyllie was clear that future acquisitions remained on the agenda. For three years he has spoken of making a “transformational transaction” as he implements his strategy of positioning Costain as a complete end-to-end supplier. This demands Costain having the skills to take a scheme from concept through to operations and maintenance.
But Wyllie was clear that the May Gurney deal was not the “transformational transaction” that would complete this strategy.
“This is a transaction,” he stated, declining to describe it as “transformational”.
Costain chief executive Andrew Wyllie has stressed that the proposed merger with May Gurney would not spell the end for its AOne+ highways maintenance joint venture with Colas and Halcrow.
May Gurney is prominent in local authority highways maintenance, but Costain is to continue to work as part of the AOne+ JV for Highways Agency work.
“AOne+ to start with will be unaffected, and I would expect that to continue,” said Wyllie.
AOne+ is being tipped to land the latest of the Highways Agency’s Asset Support Contracts to be awarded in Area 3 covering south east England.
Last week AOne+ discovered that its Managing Agent Contractor contract for Area 7 was to be extended by two years.