Spanish giant in reach of Leighton's glittering prize

THE games have now really begun. All the impediments that might have prevented Spanish construction giant Grupo ACS from buying up to 50 per cent of its German equivalent, Hochtief, have fallen away.

ACS is now tantalisingly close to getting its hands on the main prize: 54 per cent of Leighton Holdings.

Hochtief and its allies on the Leighton board put up a bold fight in an attempt to force a downstream bid for the Leighton minority shareholders, but found no joy with the Australian Securities and Investments Commission or our Takeovers Panel.

Hochtief's last defence fell away this week when the German corporate regulator, BaFin, cleared the way for ACS's offer to take its 29.8 per cent stake to 30 per cent, after which it can buy additional shares up to 50 per cent at whatever price it wants.

At this point it can consolidate its stake in Hochtief in an accounting sense, but in theory (at least according to German corporate law) it does not exercise control. However, as it would be able to vote out the Hochtief board and management, its power in practice would be implicit.

This takes us to the more interesting issue of what ACS wants to do with the multinational structure its sits on top of.

The Spanish-based ACS is large and over-geared (the extent to which depends on whom you speak to, as it is non-recourse debt). It is operating in two major regions, North America and Europe, both of which are economically depressed.

Consolidating Hochtief's earnings has its advantages; certainly it would make ACS's balance sheet look healthier. But the real upside for ACS would be carving up Hochtief and cashing in the chips.

By all accounts Hochtief's share price goes nowhere near reflecting the value of its parts. There would be a huge advantage for ACS in unlocking that value. It could buy some bits and sell others.

There is plenty of talk around the market that putting Hochtief's 54 per cent of Leighton up for sale would be high on ACS's list of priorities.

At the moment the various parties have entered into an agreement to leave the board and management of Leighton in place. Hochtief will continue to have only four representatives on a 12-person board. But there is no agreement on who these are and most bets are on ACS replacing the Hochtief representatives with its own.

This will be the Trojan Horse; the real battle will take place some time later.

For Hochtief, Leighton is the jewel in the crown as it accounts for 84 per cent of the German company's earnings. In this regard the child has far outgrown the parent.

Assuming ACS gets to 50 per cent of Hochtief, the financial structure of this group will be multi-level and not sufficiently sturdy to remain stable for long. This is particularly so as the weakest corporate link sits in between the two larger companies.

To date most of the attention has been focused on the personal battle between the outgoing Leighton chief executive, Wal King, who has lined up with ACS, and the rest of the Leighton board, which has been in the Hochtief camp.

If, as appears likely, the power tilts towards ACS, the deposed King could reinstate some influence over this former kingdom, or at least have some say about its future.

Nothing about this would sit comfortably with the remaining Leighton directors, least of all chairman David Mortimer.

While many analysts have just returned from a tour of the company's Asian operations and recognise the growth prospects for the region, many still see the stock as risky given the state of most other parts of the global economy and a number of well-publicised issues in Australia.

The recent profit downgrade will increasingly focus attention on what other problems are hidden within the bowels of the company and, after 23 years of King's reign, when they will emerge.

The market has for years taken Leighton on trust, given its successful growth into a major player on the world construction scene.

The implosion of the Dubai business was one of the first signs that the company was capable of making poor judgments. The Brisbane Airport Link was a more recent mistake and one that cost its 2010 profit dearly.

Now there are questions about whether the new boss, David Stewart, has really cleared the slate. As he does not officially take over until next month, it would not be surprising to see him have another go in six months.

Few analysts are calling Leighton a buy at this point. This might put some time pressure on ACS if it wants to place Hochtief's shareholding in Leighton to investors or attempt to find a corporate buyer.

If there are some nasties hidden inside Leighton, fingers will be pointed at the current board.

At this point these concerns are not fully reflected in Leighton's share price, which is trading about 17 times earnings. If corporate activity shines a spotlight on Leighton, it may uncover issues that sceptics have been worried about for a while.

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