The new Spanish-driven Leighton Holdings is taking shape, with the $1.15 billion sale of the John Holland construction business to a Chinese group the largest plank in the simplification plan Leighton and Hochtief chief Marcelino Fernandez Verdes outlined six months ago.
Fernandez Verdes has made it very clear that he wants to streamline Leighton into a simpler, more conservative business focused on public/private infrastructure partnerships and contract mining and has been moving at some pace since being appointed Leighton chief executive in March.
Easily the biggest element of the plan to simplify and deleverage the group was the sale of John Holland, which has been part of a quite complex and over-lapping structure of competing brands and businesses within the Leighton group since 2000.
Its sale to China Communications Construction Company, a Hong Kong and Shanghai-listed entity with a market capitalisation of about $23.5 billion, will create a more conventional group structure as well as reducing Leighton’s gearing by about 10 percentage points.
Fernandez Verdes has already been attacking Leighton’s balance sheet, with gearing down to 33.7 per cent in the September quarter and net debt cut from $1.5 billion at 30 September last year to about $950 million. The John Holland sale, even though the proceeds will be somewhat lower than some market estimates, will bring gearing within the lower end of Leighton’s targeted range of between 20 per cent and 35 per cent.
Leighton does have some other asset sales in its pipeline, including its service businesses, a portfolio of property developments and its majority shareholding in home builder Devine.
The potential equity requirements to support public/private partnerships necessitate a conservative balance sheet but the more cynical in the market also believe that Hochtief, which owns about 70 per cent of Leighton after its controversial partial bid earlier this year, may also want to create the capacity for share buy-backs that would help it increase its ownership level.
That’s the strategy Hochtief’s controlling shareholder, Spain’s ACS, used to cement its control of the German group. Operationally, Fernandez Verdes is also following the same blueprint he used when ACS put him in charge of Hochtief. He sold assets, carved into its debt levels and created a simpler structure and operating model.
At Leighton, apart from rationalising a complex portfolio, he is grouping like activities together to generate economies of scale, greater transparency, less internal competition and duplication and lower costs. That’s precisely what he did at Hochtief and, by eventually re-making Leighton along ACS’ and Hochtief’s lines, he would be able to put together global business units.
At some point that might generate a bonanza for the minorities holding the residual 30 per cent of Leighton.
Hochtief is thought to have opted for a partial bid for Leighton to avoid triggering covenants in Leighton’s borrowings that could have forced it to refinance the debt. As the debt is wound down and Leighton’s cash flows continue to swell, ACS and Hochtief will inevitably want to get full access to those cash flows at some point, giving the minorities leverage.
The sale of John Holland will shift about $3.7bn of revenue and 4,100 employees from Leighton to CCCC International, a China Communications Constructions subsidiary, and instantly make it a major player in the previously quite concentrated local construction industry.
The Chinese group, one of the world’s largest construction companies, specialises in large-scale and complex transport infrastructure projects.
Its experience in building roads, bridges, ports and railways dovetails with John Holland’s expertise in roads, rail and tunnelling and is well-timed to gain an exposure to the current emphasis by the federal and state governments on infrastructure projects, particularly roads and rail.
While the group says it has a very high regard for the John Holland management team and that it had been critical that there should be 'cultural affinity' between the two businesses, the chemistry between the new Chinese owners and their new local managers and employees will determine the success or otherwise of its bold entry to this market.