Leighton's asset sales could turn to fire sale

As Leighton Holdings sets off on a strategy to identify and sell more than $1.5 billion of non-core assets, it will need to be careful it doesn't end up selling so much that it ends up like the Black Knight in the famous Monty Python comedy sketch who has his arms and legs cut off before he realises what has happened.

As Leighton Holdings sets off on a strategy to identify and sell more than $1.5 billion of non-core assets, it will need to be careful it doesn't end up selling so much that it ends up like the Black Knight in the famous Monty Python comedy sketch who has his arms and legs cut off before he realises what has happened.

Leighton is selling the assets to raise money to partly reduce debt as a $670 million interest-bearing liabilities facility is due this year and a $600 million working capital facility must be refinanced next year. The concern is that in its quest to raise money it may be selling some assets that it will later regret losing.

The sale of assets kicked off in earnest yesterday when it sold its waste management business for $218 million to Germany's Remondis and Co Kg, subject to certain conditions including the successful transfer of major customer contracts. The business makes a profit and was sold below the $250 million to $300 million the market had hoped for.

It is the first of several assets to be sold as the construction giant reduces debt as well as tries to ensure it can pay dividends to investors including its major shareholder, Germany's Hochtief, which owns 50.6 per cent of the company. Those dividends are needed by Hochtief to funnel down the line to Hochtief's main shareholder, Spain's debt-ridden ACS, which has also been selling assets to reduce its debt.

Other asset sales are speculated to include its 50 per cent stake in listed property company Devine, its 32 per cent stake in Sedgman and 19.9 per cent stake in Macmahon Holdings, which together could fetch more than $150 million. It is also believed to be considering selling its Leighton Property business, which it has had since the 1970s, and which has a book value of between $200 million and $300 million. Its Nextgen wholesale cable business is also believed to be for sale, after the company took it out of Leighton Contractors and put it into Leighton Holdings. This business could be worth well in excess of $700 million. Its John Holland subsidiary has an aviation services business that could also be sold, and Leighton has equity positions in some private-public partnerships.

The sale of non-core assets would be viewed positively by the investment community as long as the sales aren't at fire-sale prices or shrink the business too far.

The company sold its HWE Mining Iron Ore last year to BHP Billiton during the height of the iron ore boom. It also sold 35 per cent of its Leighton India business to Welspun last year to raise cash, but there are concerns it agreed to an onerous set of conditions that could one day blow up in its face.

Leighton has a long row to hoe as it still has big issues in the Middle East to sort out.

Closer to home, some projects continue to struggle, including Victoria's desalination plant and a $705 million Sapphire to Woolgoolga upgrade of the Pacific Highway in New South Wales, which is believed to have claims on the job of up to $140 million. Industry sources said Leighton set the job up poorly and got hit by

wet weather.

The mood of minority shareholders in Leighton is that there are still too many unknowns lurking in the company to feel confident that the worst is over.

As the banks get tough on property developers and builders, and creditors delay paying bills by almost twice the standard 30 days, at least 35 residential property builders are either going to the wall or trading while insolvent.

In Victoria, there were 69 construction tradespeople business bankruptcies, which make up 18 per cent of the total business bankruptcies in Australia over the past 12 months. By comparison, there were 141 business bankruptcies in NSW and 134 in Queensland over the same period.

In the past month, Australian Kitchen Industries, which includes the Impala Kitchens brand, went into voluntary administration. Before that, Reed Construction, Hastie Group, St Hilliers and Kell & Rigby all went belly up.

Behind them are dozens of smaller companies operating in residential construction and hanging on by a thread. Some deliberately fail to pay suppliers knowing they won't be wound up because it is too expensive.

One subcontractor said more companies were not offering trading terms but demanding cash. Suppliers who are paid in cash offer their services or products at an average discount of 10 per cent. This is the margin for the difficulty and increasing risks of getting money out of dodgy builders.

The problem is somebody has to pay for this discount and it is usually the end consumer, with a knock-on effect on the rest of the economy. According to national debt collection agency Prushka's data base, builder judgments are running at 14 per cent of total company judgments and 50 per cent in Victoria, 34 per cent in NSW and 16 per cent in Queensland.

A big part of the problem is the delay of payments to these businesses, which puts their cash flows under undue pressure. According to the country's biggest receivables management and credit report company, Dun & Bradstreet, the trade payment terms for the construction sector are 52.8 days, which is almost double the conventional standard payment of 30 days and slightly worse than the national average of 52.6 days to settle accounts. In 2003 the average was 45 days.

Payment trends are known to be an accurate leading indicator of an economic correction.

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