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Pain before gain

Metronet, Scottish infrastructure - Is Atkins being prudent by taking its latest Metronet hit on the chin?

FIFTY MILLION pounds sounds like an awful lot of money. For an individual, finding something do with it would be almost unfathomable, unless you are a footballer perhaps. How about for a business?

'I'd turn developer temporarily and build a truly sustainable building to show off what we can do, ' says Skanska Technology managing director Keith Marr.

'Set up an academy to foster the best talent in the industry in perpetuity, ' adds Capita Symonds MD Jonathan Goring.

'Create the ultimate engineering institution and rent Keith Marr's sustainable building to house it, ' offers Whitbybird design director Mark Whitby.

In rather less philanthropic mood, Scott Wilson chairman Geoff French would 'use it to accelerate our growth organically and by acquisition'.

Atkins, even more pragmatically, announced last week that it would be using £50M of its £185M net assets to cover its current losses in the Metronet consortium. These were accrued mostly via the pain half of the pain/gain performance mechanism in its public private partnership (PPP) with London Underground.

Metronet has been managing two thirds of London Underground's 30 year PPP Tube upgrade since 1999.

Five shareholders - Atkins, Balfour Beatty, Thames Water, Bombardier Transportation and EDF Energy - each own 20% of the joint venture.

Although Metronet is reportedly performing much better now, Atkins put a number in its trading statement last week to establish the cash cost to the business of the less than shining track record of the early years of the joint venture.

The £50M is the cash impact of an exceptional loss of £36.9M also announced in the trading statement. NCE understands the figure is roughly equal to the funding necessary to sustain an additional £200M of turnover for a consultancy business.

In Atkins' terms that would be another 14% on its current £1.4bn annual turnover. It is not insignificant, but for a firm of its size it is a manageable hit.

So the City greeted the news with enthusiasm. Atkins shares rose a coincidental 14% to £11.40 on the day of the trading statement and were as high as £11.73 as NCE went to press.

The City was also happy with the announcement of an injection of a further £12.7M of equity into the Metronet jv, taking Atkins' current investment to £50.7M and the suggestion that the firm may accelerate the payment of the final £19.3M of its planned equity contributions and cough them up in the coming 12 months.

Atkins chief executive Keith Clarke, while not exactly cock a hoop about Metronet casting a shadow over what was a highly positive trading statement for his business could at least joke that he'd announce exceptional losses again if they had the same impact on the share price.

'We are in a very strong position not to have debt, ' he said.

'We've been prudent and we are a fundamentally sound business.

There is nothing wrong with the PPP contract. Risk and reward is sensibly proportioned. You just need to perform to make money.' Suggestions that Atkins might walk away from the Metronet jv were dismissed. The company is committed to getting Metronet and London Underground successfully into the second seven and a half year period of the PPP where, hopefully, the fi rm will be able to start taking some gain from improved performance.

Meanwhile the City has a better handle on the exceptional items relating to Metronet ahead of the increasingly likely extraordinary review to resolve who pays what out of a £750M disputed overspend.

'You could argue that this is a nice way to go into negotiations with London Underground.

Atkins has dealt with all the obligations to date and the City likes what it sees, ' says analyst Francesca Raleigh of Numis Support Services.

In which case that £50M could not have been better spent.

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