Britain鈥檚 regional builders have suddenly become irresistibly attractive purchases for major contractors across Europe. Tom Bill finds out why.

You would think that if anyone could see their own redundancy coming it would be the HR director. Not Alan Kitto, who headed that department at Stradform, a Cardiff contractor that was bought by Vinci subsidiary Norwest Holst for a reported 拢7m in December last year.

According to one source close to the deal, Kitto thought everything was 鈥渉unky-dory鈥� on Monday 21 January this year, days after the ink had dried on the deal. On Tuesday he was clearing his desk, as was Martin Vaughan, the company鈥檚 construction director for Bristol, and five board members of Fifehead, Stradform鈥檚 parent.

Kitto is unlikely to be the last casualty at a regional contractor in 2008.

Of course, takeovers do not automatically result in redundancies, but the 拢75m-turnover business, which employed 200 staff, is the latest in a wave of regional contractors to be snapped up by larger players. Take Balfour Beatty鈥檚 拢52m takeover of Bristol-based Cowlin in August, ISG鈥檚 拢13m takeover of Bristol contractor Pearce in November and Bouygues鈥� 拢30m purchase of Portsmouth contractor Warings in December.

There is clearly something going on here other than baby-boomer bosses deciding it is time to cash in and buy a retirement home in Spain. In fact, the wave of acquisitions started after Labour鈥檚 second term began in 2001, when it began its huge spending programmes on schools, hospitals and affordable housing. Resources at the larger contractors were spread more thinly as a result, prompting acquisition-led growth to plug the gaps.

More recently, the sophisticated demands of clients have driven the trend. They increasingly seek complex project management skills as part of a contractor鈥檚 package. Mid-sized players can struggle to meet these expectations, so when a big contractor comes knocking, moving under its umbrella can seem attractive.

Mike Peasland, group managing director of Balfour Beatty, explains the change from the point of view of Britain鈥檚 biggest contractor: 鈥淭he introduction of PFI meant our average project value rose from 拢3m to 拢12m. When we shifted our focus onto bigger jobs we left a void behind. That was the reason why Mansell [a national contractor bought for 拢42m in December 2003] could capture the regional market of 拢1-5m projects.鈥�

Matt Bray, senior practice manager at construction recruitment specialist MRG, says another attraction is that regionals enjoy a steady stream of work. 鈥淟arge groups will only win one in every five massive jobs, but a mid-sized regional player on a local authority framework has 60-70% of its work guaranteed from the framework, which is an attractive flow of cash to the big boys.鈥�

Peasland agrees that regional contracting is 鈥渓ess spiky鈥�, but Balfour Beatty is hardly in desperate need of cash. Another reason driving its acquisition trail, suggests one observer, is shareholder pressure: 鈥淏alfour is focused on mopping up regional contractors because it is sitting on a huge pile of cash and shareholders are crying out for it to do something with it. Its first option is share buybacks or to return it as shareholder dividends. The second option is to invest it in new businesses. Leaving it to sit on the balance sheet is not an option.鈥�

There鈥檚 little doubt that there will still be easy pickings in the future 鈥� be they good ones or bad ones

Kevin Cammack, Kaupthing

It鈥檚 a suggestion that Peasland rejects. 鈥淭here鈥檚 no pressure to spend the cash. We鈥檙e spending it and we keep replenishing it. It鈥檚 better than being in a position of having to raise the cash through a rights issue.鈥�

As for the notion of a client-driven change, Alastair Stewart, an analyst at Dresdner Kleinwort, believes rising demands will result in one regional contractor being bought every six months. He says: 鈥淢ore and more clients are looking for a range of project management, facilities management and funding services, which is unfortunate for the regional groups.

鈥淭hese regional companies are smart operators with formidable local knowledge, but to get involved in PFI at their size is a problem. Then you look at a big company with a strong balance sheet, huge PFI intellectual capital at head office and the answer is logical.鈥�

There are other advantages for national contractors apart from the steady flow of cash, says Kevin Cammack, an analyst at Kaupthing. 鈥淭he big boys can feed smaller companies into larger clients such as BAA for example. It鈥檚 being driven from all sides. Some want niche players and will pay for the skills, others want to grow quicker with the extra client base.鈥�

And he argues that the integration process is not complicated. 鈥淪maller regional players are quite an easy fit, so if you have four or five it makes sense to have seven or eight.

鈥淭here鈥檚 little doubt that there will still be easy pickings in the future 鈥� be they good ones or the bad ones that have got into trouble as a result of the credit crunch and will get mopped up anyway.鈥�

The trend has also been driven by regional players facing growing pains of their own as the government building programme kicks in at a local level.

David Lawther, chief executive of fit-out specialist ISG, says regional players can reach a critical mass after which point it makes sense to look around for suitors. ISG bought Propencity for 拢12.5m in September 2005. The group included northern contractor Totty, east of England contractor Jackson and fit-out specialist Dean & Bowes.

鈥淭hey grow until they reach a stage when it becomes operationally difficult to take the next step. To make that happen requires investment and process systems on another scale.鈥�

As 拢150m companies, it is likely regional firms will implode if they try to carry on

Mike Peasland, Balfour Beatty

Peasland agrees. 鈥淎 lot of regional companies have gone from being quite small to taking on work in affordable housing, owing to government expansion. They have moved rapidly from being 拢30-40m to 拢150m companies. At that level it is likely they will implode if they try to carry on.鈥�

But why did 拢23bn-turnover Vinci bother with the relatively tiny Stradform? Cammack says that companies such as 痴颈苍肠颈鈥檚 great rival Bouygues, German firm Hochtief and Sweden鈥檚 Skanska are pitching at a smaller end of the market than the likes of Carillion and Laing O鈥橰ourke because they have a different mindset.

鈥淢aybe they have learned from the mistakes made by British companies in the nineties, which went over to Europe not realising that construction markets were quite local. It鈥檚 part of the foreign mindset whereby you build a far better business by buying a local firm and building up slowly. You can win trophy projects but for the long term, you have to start at the bottom. Look at the problems Multiplex had with Wembley鈥�

A source close to Bouygues says the company drew up a hit list of 100 UK firms early last year. It is understood now to be in serious dialogue with two or three of these. The source says: 鈥淭hese are companies of more than 拢100m turnover but certain things have to happen in terms of their balance sheets and settling claims before Bouygues will take it any further. Bouygues is an absolutely meticulous operator.鈥�

Making sure the deal works once the papers have been signed is another matter altogether. Garvis Snook, chief executive at Rok, the self-titled 鈥渘ation鈥檚 local builder鈥�, knows more than most about how to handle takeovers. His 拢683m-turnover company has bought 17 companies in the past eight years, ranging in price from 拢1m to 拢32m. So how does he make sure the integration process does not disrupt business or morale? 鈥淐ommunicate, communicate and communicate until you puke.鈥�

The staff attrition rate at Rok in the 12 months after a takeover can vary between 5% and 20% depending on how on board the local leadership is. 鈥淚t鈥檚 like going dancing. You have to try out various partners and get to know each other first so that when you propose you know it will work.鈥� He believes the economic downturn could make the next few months a good time to buy.

A source close to Balfour Beatty鈥檚 Cowlin deal says the move from family company to plc was a largely painless deal. 鈥淭here were some who found the Big Brother thing overbearing and left but most said it had secured their workload and brought the company into the 21st century.鈥�

鈥淯ncertainty is the biggest killer in these deals, though,鈥� he says. A fact Alan Kitto would agree with.

Two sides of a takeover

Since French construction giant Vinci bought Cardiff contractor Stradform in November, there have been about 10 senior redundancies, with more people expected to leave amid the uncertainty. Here are two takes on what happened:

A senior Stradform employee

We never saw anyone from Vinci so we didn鈥檛 know what was going on. Talks only involved the owner of the company and his advisers.

They should have explained the strategy and talked to the directors of the business to listen to the opinions of people on the ground. It was obvious from where we were sitting what was going to happen, but nobody thought to talk to us.

The feeling among staff down in the Bristol office was that Vinci was only interested in the Cardiff business. Staff numbers in Bristol started dwindling in November, which turned into a rush in the new year.

We lost work because of the uncertainty. The takeover rumours reach the clients. What they failed to understand is that in a regional setting personal relationships count for everything.

David Joyce, chief operating officer, Vinci

During the takeover period I鈥檇 expect the staff to be in the dark to be honest, which was mainly down to the Stradform board.

Once the takeover was completed I personally went to talk to the Stradform people in Bristol, Birmingham and Cardiff.

The first time we met the Stradform staff in Bristol we said they would have to move office 鈥� a better office incidentally. It was the old adage of
there being no point in having two when you鈥檝e got one already.

Yes, there was a certain amount of uncertainty but I always made it clear that Stradform would continue to trade under its own name.

And who might buy them 鈥�

Balfour Beatty
Is looking for contractors based in Kent and the south Midlands, although some suggest there may be a bigger deal in the pipeline.

Galliford Try and Kier
Both are tipped to buy mid-sized contractors.

The Europeans
The billions that will have to be thrown at the UK鈥檚 creaking Victorian infrastructure in coming years make this country an attractive proposition for European companies from countries where the trains run on time.

Bouygues is looking for 拢100m-plus regional contractors across the UK. It is understood to be in advanced talks with two or three, although some have suggested it may make swoop for a large player such as Costain.

Hochtief may be less inclined to splash the cash after some recent acquisitions in Germany.

Ferrovial may be looking at contractors over here, as the Spanish market pauses for breath.

痴颈苍肠颈鈥檚 purchase of Stradform will not be its last according to the company鈥檚 stated aim of buying regional companies.

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Postscript

Illustrations by Martyn Shouler