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New merger thinking

Comment: Andrew Bolton

Last week two Dutch contracting giants engaged in the kind of takeover battle unheard of since the early 1990s. HBG, which owns Nuttall and Kyle Stewart, is now trying to fend off a hostile bid from its smaller competitor, Royal Boskalis.

The rationale behind the Boskalis bid reflects changes at the heart of the European contracting sector.

Conventional wisdom dictates that contractors should merge to cut out over-capacity and increase efficiency. This is the thinking that drove the Tarmac/Wimpey asset swap of a few years ago. But few similar mergers have materialised, perhaps because the cost of wiping out spare capacity is so prohibitive.

Now, mergers are following a different path. Boskalis is less interested in wiping out spare capacity than in becoming a strong, high margin global player. With HBG it believes it can form a group with the financial muscle to compete in the emerging world market for long term partnering work and privately financed infrastructure.

This new philosophy is reflected in last month's report on European contractors by merchant bank Robert Fleming.

'We are sceptical about the mantra of 'consolidation' as a solution to industry competitiveness,' says the report. 'Two small, dull general contractors will just become one big, dull general contractor, with only slightly less bad margins. It will not bring any technical skills or client franchises to the combination.'

It adds that size is almost irrelevant when contractors compete on a lowest bid wins basis. 'A big contractor is as easy to knock down on price as a small one,' says Fleming.

Partnering and the success of privately financed public sector schemes, particularly in the UK, are the drivers behind merger thinking among contractors. This emerging sector is different to the rest of the construction market as it has ready made barriers to entry. Bidding for privately financed infrastructure or partnering contracts is expensive and time consuming. This automatically makes it harder for tight margin small and medium sized contractors to compete.

HBG belongs to the emerging super league of the top 20 European contractors which are beginning to dominate this market. If £487M turnover Boskalis succeeds in tying up with £2.5bn turnover HBG, it will be able to compete with the likes of Amec, Bovis Lend Lease, Laing, Kvaerner and Euro giants like Bouygues and Hochtief. Failure to carry off the merger could dent Boskalis' attempts to haul itself out of the hard nosed low margin world of traditional tendering, into steadier, higher margin partnering and privately financed infrastructure.

Other contractors in the same turnover bracket face similar problems. Forming consortia is one way around it, but these tend to be loosely based one-off groupings only capable of short term profit streams. Slimming down and specialising is the other option, but this rarely appeals.

The debate over the future shape of successful contractors should be a particularly hot topic in the boardrooms of firms such as Sir Robert and Alfred McAlpine, Taylor Woodrow, Mowlem and Tilbury Douglas.

Andrew Bolton is analysis editor of NCE

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