The broad outcomes from Leighton Holdings’ strategic review follow a familiar blueprint. Why wouldn’t they, given that same blueprint has proved so successful within the larger ACS/Hochtief group that actively controls Leighton?
What’s planned for Leighton is very similar, albeit it isn’t remotely as leveraged as Hochtief was before Fernandez Verdes got to work.
Leighton has traditionally had quite a confusing structure, operating under a number of different brands which often competed for contracts despite having particular niches of expertise.
For a long time, under long-time chief executive Wal King, the structure and strategy was exceptionally successful. Not long after King’s departure in 2010, however, his successor David Stewart was forced to deal with a succession of disastrous contract outcomes that destabilised the group and which truncated his tenure.
Former chief executive Hamish Tyrwhitt and his finance director Peter Gregg brought a lot more discipline and stability to the group until they were ejected by the Spaniards as they moved to exert control of Leighton. The strategy outlined by Fernandez Verdes today is a next step towards a simpler and more rational model.
There will be divestments, with the John Holland construction business as well as Leighton’s services and property units either to be sold or partnered with third parties. Inevitably Leighton’s investments will also be sold. Leighton has already hired external advisers for the planned divestments.
The ongoing model will see like activities grouped together (as has happened within Hochtief) with dedicated construction, mining, public/private partnerships and engineering businesses. Fernandez Verdes believes that will create economies of scale and greater transparency within those businesses while also removing duplication and bureaucracy and lowering costs.
Aligning the Leighton structure with Hochtief’s would also eventually enable ACS to create a globally integrated series of business units. Hochtief didn’t make a full bid for Leighton earlier this year because it wanted to avoid triggering covenants that would have forced it to refinance Leighton’s borrowings. In time, it is almost inevitable that Leighton will be subsumed into the larger ACS group.
In the meantime, the focus within Leighton will be on strengthening its balance sheet further (Tyrwhitt and Gregg had significantly reduced its gearing), lowering its cost base and improving its cash conversion.
Leighton has more than $5.1 billion of receivables, much of it related to LNG projects that are yet to be completed. Fernandez Verdes has made it clear that recovering those receivables will be a real focus of the broader plan that will be implemented over the next 12 months or so.
For the minorities holding 30 per cent or so of Leighton’s shares, the Fernandez Verdes game-plan could produce a windfall lift in returns, if Hochtief wants to get its hands on some of the cash from the divestments and receivables and the hoped-for structural improvement in profitability.
Hochtief took control of Leighton, discarding what turned out to be an unenforceable agreement (albeit one that had been in place and observed for a long time) because its Spanish masters, while apparently reasonably pleased with the progress Tyrwhitt and Gregg had made, weren’t satisfied with its rate or depth.
Putting Fernandez Verdes in place -- he’s the probable successor to ACS’s executive chairman, Florentino Perez -- should result in a blitzkrieg of activity and potentially some compensation for the minorities for being trapped in the register by the partial nature of the Hochtief bid.