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Mouchel boss defends decision to reject Interserve and Costain bids, but admits move leaves firm 'vulnerable'

Mouchel chief executive Richard Cuthbert has admitted his firm remains “vulnerable” after rejecting takeover bids from Interserve and Costain.

Cuthbert’s board revealed this week that it has rejected the latest takeover proposals from Interserve and Costain and ended all talks with suitors while posting a 73% plunge in half-year profits.

Mouchel shares lost 50% of their value when the decision was announced, crashing from 147.5p at close on Monday to 94.4p by mid-morning on Tuesday. By 3pm the price had barely recovered to 99.5p.

Cuthbert said the low price made his firm vulnerable to other hostile approaches.

“If our share price stays at a quid for too long we are a bit vulnerable,” he told NCE on Tuesday. “Today is not our best day and tomorrow won’t be particularly pretty in terms of headlines.

“What we have tried to do is say ‘enough is enough’ and get back to focusing on the business. Hopefully we can stay out of the headlines for a while and let the share price recover,” he said.

The consultant finally ended months of takeover talks with Interserve after the group slashed its approach to £151M after carrying out due diligence on Mouchel’s books.

The firm also threw out the Costain bid, after it too reduced its £175M bid after carrying out due diligence.

Cuthbert said neither bid was in the best interests of the firm’s shareholders.

He said that Interserve was fixated on Mouchel’s immediate financial woes. Half-year results published this week revealed that revenue for the six months to 31 January was a disappointing £270M, down 13% on the same six months of last year.

The drop, which was mainly a consequence of government cuts to highways spending, meant that profit before tax and exceptional items collapsed 73% to £4.1M.

The firm has also been forced to cut costs, with around 1,000 redundancies made since July 2010.

“Our view is that Mouchel is not a bad business and while we may not worth much today, we will be worth a lot tomorrow,” he said. “Our view was that Interserve’s offer of 135p per share was just too low.”

Last year VT Group had offered Mouchel 300p per share, before its bid was derailed when it became a takeover target itself.

Since then Mouchel shares had fallen dramatically, prompting interest from Costain. Its shares had been trading as low as 53.25p in late 2010, down on a year high of 285.25p.

Costain made its first approach in December last year, with an all-share deal that valued Mouchel at £119M. It upped this bid twice, but had reduced it again after completing due diligence.

Costain’s bid was driven by its strategy to expand significantly in consultancy and was attracted to Mouchel’s strong portfolio in highways.

But Cuthbert said that Mouchel’s shareholders had never been keen on taking on Costain shares in place of cash.

He added that there were also concerns over how the companies could integrate. “The integration risks were quite high and there were potential conflicts in the highways sector,” he said.

Had the takeover gone through Mouchel would probably have had to dissolve its successful term maintenance joint venture with Enterprise. The combined Costain and Mouchel could also have encountered problems winning work with the Highways Agency because of its market dominance.

Cuthbert said he was now keen to refocus on the business.

“I have spent rather a lot of time over the last few months talking to bankers and lawyers and I would rather be talking to our clients and staff,” he said.

Tough trading ahead

Cuthbert admitted that in the short term, trading remained tough.

“It has been another challenging period for Mouchel,” he said. “Our clients have been impacted by the tough economic climate, leading to cuts in capital and maintenance programmes and a decline in spending, which has negatively affected our performance.”

The firm has revealed it is closing 14 offices and had made around 1,000 staff redundant since July 2010, when it employed 10,200.

Figures provided for NCE’s Consultants File, published this week, state total staff numbers as at 2 January of 9,122.

Cuthbert said he hoped there would be no need for more redundancies.

“Every manager in our business is on high alert to match staff levels to workload, and that’s particularly difficult when you’ve got a declining top line.

“But our feeling is that while it is not getting better yet, it is not getting worse. So hopefully when things pick up we can go to the contract market to get more staff.”

The firm has taken its biggest hit in its highways business. Revenue for the first half of 2010/11 for the highways business was £96M, a 22% reduction on the comparative period last year. This reduction in revenue led to an 82% decline in underlying operating profits to £1.7M as the firm initially delayed its decision to release staff until the extent of the deferral in workload became clear.

Its UK infrastructure services business, which includes its Managing Agent Contractor contracts (MACs) for the Highways Agency, saw activity levels down 20% and underlying operating profits halved. The impact on demand for consultancy services was more severe as clients deferred discretionary work, resulting in a 30% revenue decline and the business suffering a loss.

To counter this decline in workload the firm has cut headcount by 14% to 3,488 from the level at January 2010. It said further reviews continue at a local level to “ensure resources are matched to immediate client workloads”.

The management consulting division reported revenue down 10% at £27.3M. Headcount at January 2011 was down 22% at 358 compared with the position at the end of January 2010.

Even revenue from its regulated industries was down 12% to £41.5M. The water business fell into loss in the first six months after its AMP 5 business ramped up more slowly than expected, despite a 10% increase in revenue. Engineering and environment workloads fell by about 30%, principally as a result of the reduced activity of its highways business, and also reported a loss. Its business in the rail sector, from which it substantially withdrew in 2009/10, saw a 40% reduction in revenues as a number of contracts were completed. In response to lower demand for its consultants it has reduced its headcount by 13% over the last 12 months to 1,643 at January 2011.

Readers' comments (1)

  • Isn't NCE being a bit alarmist? Seems to me that, on the figures quoted Mouchel's share price would have lost just 36% of their value, not 50% as stated.

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