By Ian Fraser
Published: Sunday Herald
Date: 25 February 2007
DEAL OF THE WEEK: AMEC SPIE RAIL SYSTEMS
Huge disposal part of wider restructuring by Waverley revamp firm
THE galvanising effects of private equity were apparent last week when the London-based engineering group Amec announced the sale of its 50 per cent interest in joint venture rail engineering business Amec Spie Rail Systems.
Amec is selling its half share to Colas, part of the massive Paris-based Bouygues Construction Group, for an undisclosed sum. However the deal, expected to be completed on April 2, is noteworthy beyond its financial size. It is the first of many such disposals by Amec, an engineering group that lost its way after diversifying into too many areas of the property, infrastructure and engineering markets under the leadership of its former chief executive Sir Peter Mason.
The deal can also be seen as signifying the power of venture capitalists to precipitate corporate change. Last year, Amec was subject to a takeover bid from US private equity firms Texas Pacific and First Reserve. The bid, at 450p a share, was rejected as too low by Amec’s board, which refused to open its books to the bidders. Texas Pacific and First Reserve walked away last month.
However, the mere presence of such interest from US-based venture capitalists is seen as having spurred Amec’s management into bringing forward, and possibly even radicalising, their much-needed restructuring programme. “It definitely galvanised everyone at Amec,” said Charlie Cottam, an analyst at Panmure Gordon.
Samir Brikho, the Swedish-Lebanese businessman who took over from Mason last October, seemed happy with the deal. He said: “This is a good outcome for our rail business. The disposal of our interest to Colas is consistent with my objective of finding strong purchasers with good prospects for all of the built environment businesses. The successful disposal of these businesses is a key objective for 2007.”
Amec, once seen as the golden boy of UK construction, hit hard times after issuing a series of profits warnings and write-downs in the period up to 2005/2006. These stemmed from its unfortunate habit of under-pricing tender offers for major construction and engineering contracts. This led to its construction arm making losses of £25 million in 2004 and barely any profit in the year to December 2005.
The next step for Brikho is to put much bigger bits of the unwieldy construction and infrastructure empire assembled by Mason on the block. He is expected to use the investment banks UBS and Rothschild to handle the process. The former ABB Group executive is looking to offload businesses including property development, contracting, civil engineering, facilities services and public-private partnerships.
In Scotland, businesses on the block include the South Lanarkshire and East Dunbartonshire schools public-private partnership (PPP) projects, in which Amec is lead partner Amec’s Building & Facilities Services businesses in Sighthill, Edinburgh, and Finnieston Street, Glasgow and its Renfrew-based design and project services business.
The last provides a comprehensive design, engineering, management, construction and consultancy service to industry and the public sector.
Panmure Gordon’s Cottam says Amec is most likely to seek to package all these assets as a job lot. “The construction part will be the difficult one to get away, so they are likely to package it up and use the juicy PFI [private finance initiative] part as an incentive,” he said.
Brikho has promised investors that a combination of these disposals and his ambitious cost-cutting programme will see £100m returned to shareholders this year. He also believes that he can slash Amec’s costs by £100m per year and raise margins from their current level of 3.1 per cent to 8 per cent by 2010.
Amec Spie Rail Systems, which had revenues of £156m in the year to December 2005 and employs 500 people, built the extension to London’s light rail system in 2005. The business is engaged in a major refurbishment of Edinburgh’s Waverley Station on behalf of client Network Rail.
COLAS, based at Cergy-Pontoise, northwest of Paris, can be expected to honour commitments to such projects. A multinational engineering group, it is simultaneously buying the other half of Amec Spie from venture capitalist group PAI Partners.
PAI acquired its stake in the business in November 2005. Colas sees the deal as, among other things, a passport to boosting its clout in the UK market, where it already has a headquarters in Crawley, West Sussex, and numerous regional sites, including one in East Kilbride, South Lanarkshire. Its main UK businesses are in asphalt and road surfacing.
Analysts see the trimmed-down Amec as well placed to build the next generation of nuclear power stations in the UK, which were sanctioned by Tony Blair’s Labour government’s energy review last year. The company already has strong Whitehall connections and recently acquired
two nuclear businesses, the French company Game Nucleaire and NNC Holdings, Britain’s leading private-sector nuclear provider.
It also looks well placed to reap dividends from the shift towards renewables such as wind power.
Brikho has said he will give investors a further update on the disposal programme with Amec’s full-year results on March 14.
NEED TO KNOW
THE FACTS: Amec, a leading UK engineering group, has sold its 50 per cent interest in Amec Spie Rail Systems to Colas, part of France-based construction giant Bouygues.
BACKGROUND: Amec made pre-tax profits after exceptional items of just £25.4 million in the year to December 2005 despite revenues of £4.94 billion. It was galvanised into restructuring after private equity groups Texas Pacific and First Reserve launched an abortive £1.5bn takeover bid last November.