Spanish conquistadors take Leighton

The Spaniards haven’t dithered, moving ruthlessly to purge the Leighton Holdings board and senior management within days of announcing their proportional bid for the Australian construction business.

The Spanish-controlled Hochtief, which owns 58.77 per cent of Leighton, today announced a modest increase in its proposed offer as well as the departures of Leighton Chief executive, Hamish Tyrwhitt and his chief financial officer, Peter Gregg. The announcement foreshadowed the departures of three non-executive directors, including deputy chairman Paul Dwyer. Two more Hochtief-nominated Spanish directors have been appointed to the board as the group, itself controlled by Spain’s ACS, takes firm control of the business.

To their credit, the independent directors of Leighton have prized an extra $50 million from Hochtief for the price of an agreed and clean surrender and an endorsement of the revised offer. Given that Hochtief made it clear that it would exercise control already and creep its way towards its desired shareholding of around 74 per cent if the offer weren’t successful, this represents a meaningful achievement.

The bid for three out of every eight shares Hochtief doesn’t already own has been lifted from $22.15 a share to $22.50 a share. If completely successful, it would give the German group 73.82 per cent of Leighton, short of the 75 per cent level that could trigger a need to refinance Leighton’s debt.

The decisive action from Hochtief includes the immediate displacement of Tyrwhitt by its own chief executive, Marcelino Fernandez Verdes, the nominated heir apparent to ACS CEO Florentino Perez to lead the global ACS business.

Verdes’ seizure of the CEO post rather than delegating the role to another Hochtief or AVCS executive underscores the importance of Leighton to ACS and Hochtief.

The value of its existing Leighton shareholding equates to just over half of Hochtief’s own market capitalisation. Leighton’s earnings last year were roughly double those of Hochtief’s European and North American businesses.

Hochtief’s decision to exercise the power of its majority shareholding was an inevitability. It is something of an accident of history and convenience that Hochtief granted Leighton its independence for as long as it did. Hochtief has had a stake in Leighton for more than 30 years.

It was kept at arm’s length and was comfortable staying there, because for most of that period Wal King was building Leighton into one of the world’s most successful construction groups. Hochtief didn’t want to do anything to unsettle King and risk that success.

King retired in 2010. He was succeeded briefly by David Stewart during a very difficult period for the group, when several of its major projects blew out at the same time, before Tyrwhitt was appointed. Tyrwhitt is generally regarded as having done a good job in stabilising and re-orienting Leighton.

In the meantime, while Leighton was about experience the end of the Wal King era and the beginning of a period of instability, ACS and Hochtief were having their own issues.

ACS, which had ridden the Spanish building boom, and Hochtief, Germany’s largest builder, had nearly been blown up themselves by the financial crisis and their debt levels. ACS manoeuvred its way to control of Hochtief over several years to get control of its best asset -- Leighton.

The moment ACS achieved that control the fate of the “informal and non-binding” protocols that had governed the relationship between Hochtief and Leighton, and which ensured there was a majority of independent directors on its board, was probably determined.

A year ago, three independent directors resigned from the board after a dispute with Hochtief over the interpretation of those protocols. Earlier this week, Hochtief made it very clear that those understandings no longer applied.

It was an aberration that Leighton, the most important business within the ACS portfolio, should have been managed independently rather than being subsumed into Hochtief. The Spaniards are now addressing that aberration decisively -- even brutally.